What is Single Premium Whole Life Insurance?
Whole life insurance with only a single premium means you pay one premium when you start your life insurance policy, then you have no further premiums to pay, and you have life insurance protection for the rest of your life.
With whole life coverage, the death benefit is paid to the beneficiary of your choice, upon your passing. The proceeds from your life insurance plan are paid free of federal income tax.
Living Benefits
Some SPL insurance policies will give you tax-free access to the death benefit to pay for long-term care expenses. This feature can help protect your other assets from the potentially overwhelming cost of long-term care if you become disabled.
The death benefit remaining in the policy when you die will pass income-tax free to your beneficiaries.
And if you don't use any of it, the money will go to your loved ones just as you had originally planned. Therefore, your SPL plan allows you to cover your long-term care needs as required, but still leaves the maximum possible amount of your life insurance death benefit intact for your dependents.
A number of SPL plans also include a feature that will let you withdraw part of the death benefit if you are diagnosed with a terminal illness and have a life expectancy of 12 months or less.
The minimum death benefit is established when you purchase the policy, but if the policy's account value grows beyond a certain amount, then the death benefit of your life insurance can increase as well.
Withdrawal Options
SPL policies give you control over your investment, allowing access to the cash value for emergencies, retirement or other opportunities. One way to tap into the cash in the policy is with a loan.
You can generally take a loan equal to 90% of the policy's cash surrender value. This will, of course, reduce the policy's cash surrender value and death benefit, but you have the option to repay the loan and re-establish the benefit.
Companies will also let you withdraw funds and deduct the withdrawal from the policy's cash surrender value. They usually have a minimum amount that you can remove. The amount you can take out each year without paying a surrender charge might be 10% of the premium paid in or 100% of the policy's gains, whichever is greater.
However, an extra cost can arise from withdrawals or loans from your single premium policy, since SPL policies are usually considered modified endowment contracts.
This means there is a 10% IRS penalty on all gains withdrawn or borrowed before age 59 and a half. You will also have to pay income tax on those profits. Plus if you cash in the whole life insurance policy, the insurance company might hit you with a surrender charge. Make sure you review any tax implications with your tax advisor.
Tax Treatment
Your investments in a single premium policy will grow tax-deferred inside the policy. You will only pay tax on the earnings if you withdraw or borrow from the policy.
Your named beneficiaries, however, will receive the benefits income-tax free and without the time delay and expense of probate. This is an important benefit, as you do not want the effort and expense you devoted to providing death benefits for your family to be affected by unnecessary delays and probate costs.
Drawbacks
The minimum amount you can invest in a SPL policy is generally $5,000 or $10,000, which can make it cost-prohibitive for many investors.
Additions are not allowed to a single premium policy. You should only consider using funds that you had intended to pass on to the next generation or to help fund a long-term financial goal, such as retirement.
Also, you will have to meet the life insurance company's medical underwriting standards to qualify for SPL insurance policies.
Conclusion
If you have a lump sum of cash that you don't need right now and you want guaranteed life insurance protection for your family or your favorite charity, single-premium life insurance may be the ideal product for you. It is also an excellent way to begin a child's life insurance program.
For instance, you could specify a child or grandchild as the insured and keep the policy in your name. That way you would still have control over the cash value. Or you could make him or her owner as a way to remove the policy from your estate. However you choose to use a single-premium life insurance policy, remember to consider your personal financial situation and other retirement vehicles already in use so you can select and shape your life insurance policy to best match your financial needs.
Single Premium Whole Life Insurance Explained
Single premium whole life plans provide you with lifetime coverage and you pay just one premium one time.
Single-premium life (SPL) is a type of life insurance in which a lump sum of money is paid into the policy in return for a death benefit that is guaranteed to remain paid-up until you die.
With single-premium life insurance, the cash invested in the life insurance policy builds up quickly because the policy is fully funded from the first day you are insured.
The size of the life insurance death benefit depends on the amount invested and the age and health of the insured.
From the life insurance company's perspective, a younger person is expected to have a longer remaining life span, giving the funds paid (“the premium”) more time to grow before the death benefit is expected to be paid out on your policy.
The larger the amount of money you initially pay for your whole life policy, the greater your life insurance death benefit.
Example
For example, a 50-year-old female might use a $15,000 single premium to provide a $60,000 income-tax free death benefit to the beneficiaries, whereas a 50-year-old male's $50,000 single premium might give a $200,000 death benefit.
Whole Life combines permanent protection with a savings component. Part of that premium grows inside your policy as cash value. Your life insurance policy gains cash value over time. You may be able to borrow up to 80% of your policy's cash value tax-free.
Whole life insurance is commonly referred to as permanent life insurance, which is a life insurance policy that is good for the entire life of the policyholder, even if you live past age 100.
Terms and Definitions
Face Value – The original death benefit amount of life insurance coverage.
Cash Value – The savings portion of a whole life insurance policy that can be borrowed against or cashed in.
Beneficiary – The individual(s) or entity (e.g., trust) that is designated as benefit recipient to receive the death benefit of a life insurance policy.
Paid Up – A whole life insurance policy requiring no further premium payments due to prepayment or earnings.
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Disclosure: Compensated Affiliate