A Look At Single-Premium Life Insurance

By George D. Lambert AAA

The main benefit of life insurance is to leverage funds to create an estate that can provide for survivors or to leave something to charity. 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. Here we look at some of the different versions of SPL available, which offer a wide range of investment options and withdrawal provisions.

With single-premium life insurance, the cash invested builds up quickly because the policy is fully funded. The size of the death benefit depends on the amount invested and the age and health of the insured. From the insurance company's perspective, a younger person is calculated to have a longer remaining life expectancy, giving the funds paid in the premium more time to grow before the death benefit is expected to be paid out. And, naturally, the larger the amount of capital you initially contribute to your policy, the greater your death benefit will be as well. For example, a 60-year-old female might use a $25,000 single premium to provide a $50,000 income-tax free death benefit to her beneficiaries, whereas a 50-year-old male's $100,000 single premium might give a $400,000 death benefit. (For related reading, check out Living And Death Benefit Riders: How Do They Work?)

Living Benefits
While the death benefits of insurance policies provide you with an efficient means to provide for your dependents, you also need to consider unexpected expenses that can crop up in old age.
You probably understand the importance of long-term care insurance, as long-term care can often turn out to be an expensive predicament. But suppose you have put off buying this important coverage because you can't bring yourself to pay the annual premiums? SPLs can offer a solution. (To learn more, see Long-Term Care Insurance: Who Needs It? and Taking The Surprise Out Of Long-Term Care.)

Some SPL 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. 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 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. This flexibility can make the decision to sink away a large single-premium payment into a SPL policy less daunting for some people, and it is important to consider if you have limited financial assets outside of your SPL.

Investment Options
There are two popular single-premium policies that offer different investment options.
1. Single-premium whole life pays a fixed interest rate based on the insurance company's investment experience and current economic conditions.

2. Single-premium variable life allows policy owners to select from a menu of professionally managed stock, bond and money market subaccounts, as well as a fixed account.

Your choice should depend on your ability to handle market changes, the makeup of the other assets in your portfolio, and how you plan to use the policy's cash value. With a fixed interest rate, you can depend on the safety and stability of the constant growth rate in your policy, but you miss out on potential gains if the financial markets have a good run. 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 can go up as well.

On the other hand, if you prefer the possibility of underperformance over the certainty of a fixed interest rate, a variable life insurance policy with subaccounts invested in equities and bonds may make more sense for you.

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 SPL, 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 59.5. You will also have to pay income tax on those profits. Plus if you cash in the policy, the insurance company might hit you with a surrender charge.

Tax Treatment
Your investments will grow tax-deferred inside the policy. As noted above, 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 dependents to be muted by undue time delays and probate costs.

Drawbacks
The minimum amount you can invest in a SPL policy is generally $5,000, which can make it cost-prohibitive for many investors. Additions are not additions allowed. You should only consider using funds that you had intended to pass on to the next generation or to help fund a long-term goal, such as retirement. Also, you will have to meet the insurance company's medical underwriting standards to qualify for SPL.

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 policy to best match your needs.

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