What Is Single Premium Life Insurance?
A single premium life insurance (SPL) policy is a type of permanent life insurance where you pay one lump sum premium payment at the beginning of the policy, which pays the policy in full. Some people look for this type of policy because it offers a guaranteed death benefit with no additional premiums to worry about over time. There are several different types of single premium policies, such as whole life insurance and universal life insurance.
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How Does Single Premium Life Insurance Work?
Like other life insurance policies, single life premium policies offer a death benefit should you pass away. This death benefit is paid to the beneficiary that you choose.
On most life insurance policies, you will pay a premium while the policy is in force, meaning you will pay either annually or monthly to keep the premium in effect. However, with a single premium life insurance policy, you pay one premium at the beginning of the policy that will pay the policy in full.
Depending on the size of the policy, you may have to undergo medical underwriting and meet eligibility requirements.
Types of Single Premium Life Insurance
When it comes to single life premium policies, there are several different types of policies to choose from. Which one is best for you depends on your needs.
Whole Life Single Premium Insurance
Whole life insurance is one of the most popular options of life insurance. It offers a guaranteed death benefit and a guaranteed interest rate on your premiums. It also provides a cash value that builds based on the interest rate on the premiums.
A single life premium whole life works very similarly to a traditional life except one premium is due at the beginning of the policy. The cash value of a single premium whole life may be lower than a traditional whole life because less money is paid into the policy.
Universal Life Single Premium Insurance
A universal life insurance policy is another type of permanent life insurance policy. It offers a death benefit and the possibility of a cash value. Universal life is more flexible than whole life. Therefore, the return may be better or worse depending on the premiums that are paid.
A single premium universal life works by paying one premium at the beginning of the policy. This premium may pay the policy in full until a certain age. It is important to ensure the policy is properly funded so it does not lapse early.
Variable Universal Life Single Premium Insurance
Variable universal life insurance is similar to universal life, except, in a variable universal life, the cash value of the policy is invested into accounts, such as money market or mutual fund accounts, to hopefully harvest a better return. However, it is possible to take a loss on this type of policy.
On a single premium variable universal life, you will pay one premium upfront. How the money is invested will significantly affect the return or loss of the premiums.
Indexed Universal Life Single Premium Insurance
An indexed universal life policy is similar to a universal life policy. However, the returns on the cash value can be invested into an indexed account, such as the S&P 500 stock account. The returns on the premiums are dependent on the returns of that indexed account.
Unlike variable universal life policies, indexed policies generally cannot lose money. They are capped at a 0% loss rate; most indexed policies are also capped at a gain rate.
With an indexed single life premium policy, you pay one payment upfront. The return of the premium payment is invested into the indexed account. It is important to keep an eye on this type of policy because a period with no gains could cause the policy to lapse early.
How Much Does Single Premium Life Insurance Cost?
When purchasing life insurance, how much it will cost is an essential factor. Single life insurance can be expensive because you pay one large payment upfront. However, the overall premium for the policy’s lifetime may be less costly than paying premiums for the entire policy term.
You should ask yourself the following questions before purchasing a single premium life policy:
- Can I afford a large payment upfront?
- What tax advantages are there for this type of policy?
- How much life insurance can I purchase compared to a traditional life policy?
- What will the overall return on my premiums be compared to a traditional policy?
Remember that single premium life policies follow many of the same standards as traditional policies. The older you are when you purchase the policy or the worse your overall health, the higher the premium will be.
Should You Get Single Premium Life Insurance?
- One-time payment
- Tax advantages
- Guaranteed death benefit
- Fewer payments
- Higher upfront payment
- Potential loss on premiums
- Policy may grow to become a Modified Endowment Contract (MEC)
While single premium life insurance is a good alternative for some consumers, it may not be the best choice for everyone. Consider all the advantages and drawbacks before you purchase this type of policy.
Consider getting this type of policy if you meet the following:
- You can afford a large, one-time premium.
- The idea of no ongoing premiums is attractive to you.
- You can actively participate in your policy and watch the returns/losses.
- You have a basic understanding of life insurance and how they work.
There are many advantages to a single life insurance policy, such as:
• One-time payment: You’ll pay the entire premium at the beginning and will not have to factor monthly or annual premiums into your budget.
• Tax advantages: Taxes on gains are deferred until cash is withdrawn from the policy.
• Guaranteed death benefit: Because the premium is already paid in full, the death benefit is guaranteed.
• Fewer payments: Fewer overall payments compared to a similar traditional policy.
Although there are many advantages to a single premium life policy, there are also some drawbacks. Consider the following disadvantages before purchasing a single premium life policy:
• Higher upfront payment: It is a considerable upfront expense because you’ll pay the premium in one payment.
• Potential loss on premiums: Depending on the policy type, your investments may lose value.
• Policy may grow to become a Modified Endowment Contract (MEC): This means it may be taxed at a higher rate.
Understanding Modified Endowment Contracts
It is important to know that when purchasing a single premium life insurance, you may purchase a policy that falls under the MEC requirements. A Modified Endowment Contract (MEC) is a life policy with too much cash to be given the same tax advantages as a standard life insurance policy.
The Tax Reform Act of 1986 eliminated the tax shelter on life insurance policies with too much cash value. Now, if a life insurance policy does not meet the MEC test, any gain on a withdrawal is taxed as ordinary income. In addition, there may be a penalty for early withdrawal of gains. It is important to talk to a life insurance or tax expert before you purchase a MEC policy.
Alternatives to Single Premium Life Insurance
If a single premium life policy is not the best option for you, consider purchasing a traditional policy and paying the premiums in installments. Most insurance companies allow you to make premium payments monthly, quarterly, semi-annually, or annually.
Breaking the policy premiums up may be in your best interest if a large, one-time payment is outside your budget. Keep in mind that it may mean paying on a policy for the remainder of your life or many years.
All in All
Many insurance companies offer single premium life insurance. These policies provide a one-time, upfront payment with no requirement for ongoing premiums. However, if the policy takes a loss, you may have to pay additional premiums to keep the policy from lapsing.
This type of policy may not be the best fit for everyone. Knowing the ins and outs and how a single premium life policy works will help you make the best decision for your life insurance needs.