A Premium Deposit Account (also referred to as premium deposit fund) was designed for life insurance applicants who want to deposit a considerable amount of money in a life insurance policy that will earn interest and eliminate the possibility that the insurance policy could become a modified endowment contract (MEC).
Since the PDA is a transaction between the applicant and the insurer, the premium payment is discounted by the amount of interest earned on the deposit and therefore save the policyholder thousands of dollars in premium payments. The PDA is a solid solution for consumers wishing to purchase Indexed Universal Life Insurance with one lump-sum payment.
What are the Benefits of a Premium Deposit Account?
There are several benefits to using a PDA combined with an Indexed Universal Life policy:
- The insurance company will pay a competitive interest rate on the funds that are on deposit which allows the policyholder to earn interest in the insurance policy and interest on the premium dollars before they are even paid into the policy.
- Premium payments are automatically taken from the PDA so the policyholder doesn’t have to worry about making payments year after year.
- When you spread your premium payments out using the PDA, it eliminates the possibility of your insurance contract being designated as a modified endowment contract which results in substantial tax liability when you take money from the policy.
How does the Premium Deposit Account Work?
Instead of depositing a lump-sum directly into your insurance policy, the applicant would deposit the lump-sum into the premium deposit account. The first annual premium is withdrawn immediately to fund the insurance policy for the first year but the remaining money will remain in the PDA and earn interest. Each subsequent year, the annual premium is reduced by the interest earned on the funds in the PDA.
Here is an example of how the PDA will reduce annual premium payments over a 10-year period for a 55-year-old male who is very healthy and does not use tobacco. The policy is set up as a 10-pay and premiums are $11,499.38. The amount deposited into the PDA is $100,000.
| Payment Year | PDA Debit Amount | Interest Paid | Annual Premium |
|---|---|---|---|
| 1 | $11,499.38 | $11,499.38 | $11,499.38 |
| 2 | $11,137.41 | $361.97 | $11,499.38 |
| 3 | $10,786.84 | $712.54 | $11,499.38 |
| 4 | $10,447.30 | $1,052.08 | $11,499.38 |
| 5 | $10,118.45 | $1,380.93 | $11,499.38 |
| 6 | $9,799.95 | $1,699.43 | $11,499.38 |
| 7 | $9,491.48 | $2,007.90 | $11,499.38 |
| 8 | $9,192.72 | $2,306.66 | $11,499.38 |
| 9 | $8,903.36 | $2,596.02 | $11,499.38 |
| 10 | $8,623.11 | $2,876.27 | $11,499.38 |
| Totals | $100,000.00 | $14,993.80 | $114.993 |
As you can see from the above chart, by placing the lump-sum premium into a premium deposit account rather than paying the $100,000 directly into the policy, the policyholder saved $14,993.80 on premium payments over 10 years and never put the policy in jeopardy of being designated a modified endowment contract.
Are All PDAs The Same?
The life insurance industry is competitive and as such, insurance companies compete across the board concerning insurance rates, interest rates, and many aspects of their premium deposit accounts. Certainly, this competition will benefit consumers so it is important to inquire about and discuss the details and considerations of your premium deposit account. We recommend that you ask about the following topics:
- Minimum and maximum number of payments required?
- Minimum and maximum deposit amount?
- Cost of the PDA if any?
- Interest rate and schedule
- What is the penalty for a full withdrawal?
- Are partial withdrawals allowed and if so, what is the penalty?
- Who receives the unused funds if death occurs before the account is exhausted?
- Does the account owner and depositor have to be the same?
Companies that offer the best Premium Deposit Accounts
It certainly makes good financial sense to choose an insurance company that offers the best interest rates for their premium deposit accounts but it is also important that you judge a company you are considering on whether they will be the best fit for your insurance needs.
We recommend any of the following carriers for Indexed Universal Life insurance and they all offer premium deposit accounts for single-premium policies:
North American Life Insurance Company
North American Life is an A+ rated carrier by A.M. Best and offers a complete portfolio of life insurance products. The North American Builder Plus IUL product is a great solution for consumers looking to accumulate wealth for tax-free retirement income. Their competitive insurance rates and interest rates on their premium deposit account makes them one of our go-to carriers.
Allianz Life Insurance Company
Allianz Life is also one of our go-to carriers when it comes to Indexed Universal Life rates. Policyholders have several options when selecting indices such as:
- Allianz True Balance
- Blended Index
- PIMCO Tactical Balanced Index
- PIMCO Tactical Balanced ER Index
- S&P 500 Index
- Bloomberg US Dynamic Balance Index II
- Bloomberg US Dynamic Balance II ER Index
Allianz is continually awarded high ratings for their financial stability which we consider one of the most important aspects of the companies we represent.
Minnesota Life
Minnesota Life, a Securian Company, is another one of our go-to insurance companies when we are shopping Indexed Universal Life insurance for our prospective clients and the also offer a competitive interest rate on their premium deposit accounts.
The Bottom Line
If you are considering indexed universal life insurance as part of your retirement planning and prefer to pay a significant premium in advance, why not take advantage of a premium deposit account in order to reduce your insurance cost and make certain that your insurance policy has no chance of becoming a modified endowment contract?
Frequently asked Questions
What is a premium deposit account?
A Premium Deposit Account or PDA was designed for life insurance applicants who want to deposit a considerable amount of money in a life insurance policy that will earn interest and eliminate the possibility that the insurance policy could become a modified endowment contract (MEC).
How does a premium deposit account save me money?
Instead of depositing a lump-sum directly into your insurance policy, the applicant would deposit the lump-sum into the premium deposit account. The first annual premium is withdrawn immediately to fund the insurance policy for the first year but the remaining money will remain in the PDA and earn interest. Each subsequent year, the annual premium is reduced by the interest earned on the funds in the PD
Do all premium deposit accounts work the same way?
Insurance companies compete across the board concerning insurance rates, interest rates, and many aspects of their premium deposit accounts. Certainly, this competition will benefit consumers so it is important to inquire about and discuss the details of their plan.
How do I save money on life insurance with a premium deposit account?
You can save substantial premium dollars because each year your premiums will be reduced by the amount of interest you earn on the money in your premium deposit account.
