The Advantages and Pitfalls of Single-Premium Life Insurance
Single-premium life insurance offers individuals another option for tax-advantaged savings.
Ordinarily, when you buy life insurance, you pay a premium every month, quarter or year for as long as you keep the policy in force. But single-premium life insurance works just like it sounds—you pay a premium just once. How does that work, and why would you want to do that?
Single-premium life (SPL) insurance offers the advantages of other types of permanent life insurance, or “whole life insurance.” A permanent life policy combines a death benefit with tax-free accumulation of income. The premium you pay is more than the cost of providing a death benefit alone; the additional amount forms the cash value portion of the policy.
As this cash value accumulates, it can earn interest or be invested, depending on the type of policy. Any gains in your policy cash value accumulate tax-free. Policyholders can also obtain loans against their policies once the cash value reaches a certain pre-determined amount. You can take a policy loan at little or no cost, because the insurer uses income on funds invested to offset the interest charged to borrowers.
If you have a significant amount of cash to invest and heirs you want to take care of, compare single-premium life to investing in an annuity. With SPL, your beneficiaries will receive the death benefit free of income taxes. With an annuity, your beneficiaries must include any benefits in their taxable income.
SPL has other uses. You might have an older permanent life insurance policy that you no longer want to pay premiums on. Instead of letting the policy lapse and losing your cash value, you can roll your cash value amount into a single-premium life insurance policy. Using a Section 1035 exchange, you can maintain a death benefit (although probably lower than on the original policy) and reinvest the cash value you’ve built up, without creating a taxable event. Alternatively, if you withdraw your cash value, that money will be considered taxable income.
SPL can also help you multiply the effect of a donation to a favorite charity. Instead of making a cash gift, you can invest in a single-premium life insurance policy. Name the charity as the beneficiary, and your designated charity will receive the policy’s face value when you die. This will be much more than your initial investment. The downside of course is that your designated charity will not be able to access the funds until you die.
Some SPL policies include long-term care benefits. This allows you to withdraw the policy’s cash value without having to pay income taxes on it if you require long-term care services. To obtain benefits, you typically must have a physician certify that you need assistance with activities of daily living such as bathing, dressing, or eating. Traditional long-term care policies limit the amount they’ll pay on a daily, monthly or annual basis. They also limit the length of time during which they’ll pay benefits—many policies will pay only for five years. Using SPL instead of or in addition to a long-term care policy gives you extra flexibility and assurance you’ll have the funds you need, when you need them.
To buy a single-premium life insurance policy, you must generally invest at least $5,000, but many insurers require a minimum premium of $10,000 or $15,000. You must be healthy enough to qualify for life insurance coverage.
For high net worth individuals or those with special family needs, SPL can prove a valuable estate-planning tool. For more information, please contact us.
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The Advantages and Pitfalls of Single-Premium Life Insurance
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