Single premium life insurance is a specific type of life insurance policy that requires just one upfront payment. And depending on your financial situation and needs, it may or may not be a good idea.
How single premium life insurance works
Also called paid-up life insurance, single premium life insurance is typically a whole or universal life policy that you pay for with just one large upfront premium.
The policy not only provides a guaranteed death benefit when you die but also a cash value account that grows more quickly than normal because the policy is fully funded.
Depending on the type of policy you get, you may be able to control how the funds in the cash value account are invested. Specifically, variable universal life often offers this option. But if you want a safer “investment,” whole life can provide that for you.
One thing to note, however, is that single premium life insurance policies function a little differently than normal permanent policies. That’s because they’re considered modified endowment contracts (MECs).
The federal government has placed limits on how much cash you can put into a permanent life insurance policy to prevent taxpayers from turning them into large tax shelters. If you exceed these limits, which is always the case with a single premium policy, the policy becomes a MEC and is subject to different tax rules.
Specifically, you can’t take out a loan or surrender your policy and get access to the cash value before you turn 59 ½ without incurring a 10% penalty. What’s more, the IRS taxes those withdrawals based on a last-in, first-out (LIFO) basis, meaning taxable gains first, rather than a first-in, first-out (FIFO) method (tax-free contributions first) it usually employs.
The benefits of single premium life insurance
If you have the cash to do it, buying a single premium life insurance policy can provide several benefits to you and your loved ones.
You may have access to living benefits
Depending on the type of policy you get, you may be able to access the death benefit on your policy to cover the costs of long-term care or medical costs for a terminal illness. As you’re shopping around, ask insurers whether a long-term care rider and accelerated death benefit rider are included.
You’ll typically pay less money
Because of the time value of money, an upfront payment is worth more to the insurance company than periodic payments. As a result, you can typically save thousands, if not tens of thousands, of dollars by opting for a single premium policy rather than a traditional whole or universal life policy.
You get tax-deferred growth
All the gains you earn through your cash value account grow on a tax-deferred basis. This means that you won’t have to pay taxes on them until you withdraw cash. And as long as you wait until you’re at least 59 ½, you don’t have to worry about paying a penalty for withdrawals.
Who shouldn’t consider single premium life insurance
Single premium life insurance isn’t for everyone. But if you’re in the market for permanent insurance, you may want to avoid a single premium policy if any of the following apply.
You don’t have that much cash on hand
Even the best premium life insurance requires a massive upfront payment to fund the policy. If you don’t have that kind of cash on you, you simply won’t be able to afford it.
You may need the cash in the near future
Because of its MEC status, single premium policies aren’t a good option if you think you may need to access your cash value before you retire. The LIFO taxation method and 10% penalty will likely cost you more than you’d earn in gains.
Your financial situation doesn’t merit it
Single premium life insurance has a very small target market. Specifically, it may be a good product for people who have maxed out all of their other tax-advantaged retirement options, they need lifetime coverage and have the assets available to make such a large payment.
In fact, a simple term life insurance policy would be best for most people. Term insurance doesn’t provide any cash value or lifetime coverage, but it’s significantly cheaper and provides you with the coverage you need for a specific period.
How to get the best single premium life insurance
There’s no one best policy out there for everyone. Each life insurance company provides different returns, and different policy types can dictate how much you get out of your policy.
Choose the right policy
As we mentioned previously, whole life and variable universal life insurance can offer different returns. With whole life insurance, the insurer typically invests your cash value in its general account, which provides a lower but guaranteed rate of return.
It’s a good choice if you prefer less risk or aren’t savvy with investing.
If you want more control over your investments or want the potential for a higher return, consider variable universal life. With this type of policy, you have the option to invest your cash value in sub-accounts, which are structured like mutual funds with a wide array of investments.
Just remember that high reward potential also comes with high risk.
Choose the right insurance company
Because every insurance company has different underwriting criteria and investment options, there’s no one best insurer out there for everyone. As a result, you’ll need to shop around and compare single premium life insurance policies from several insurers to find the best one for you.
You’ll want to review illustrations that provide a forecast of how the cash value would perform over time, and also ask about fees and other fine print items that don’t typically come up in a sales environment.
LeapLife’s team of licensed life insurance experts can help walk you through the process of determining the right policy and insurance company. Additionally, they can help answer any other questions you have about single premium life insurance and whether it’s right for you. You can reach them Monday through Friday at (844) 755-5327 or by email at email@example.com