How Single Premium Life Insurance Works
In the world of life insurance, most policies, whether permanent life insurance such as whole life or universal life, or temporary life insurance such as term life, are paid for via monthly premium payments.
But Single Premium Life Insurance (SPL)…
Reflects a different approach to paying for life insurance. Rather than monthly premiums, SPL is single pay life insurance where you pay a single lump sum payment to fund the policy, with no payments at all thereafter.
Such life insurance policy types offer the peace of mind of knowing that your life insurance plan is fully funded from the get-go, alleviating any worries that a failure to pay premiums could cause your policy to lapse.
But…
Because single premium life insurance policies require a single up-front payment to fund, they are not a good option for those who don’t have the available cash – typically a minimum of $5,000 to $10,000 or more – to fund a SPL policy.
The good news is…
That SPL policies do offer tax-deferred growth in the policy’s cash account, unfortunately the tax treatment of such policies is not as favorable as that of traditional whole life policies that are paid for over time.
This is why…
In addition to offering SPL policies, here at I&E, we also like to offer a full gambit of different life insurance products to consider.
The key for you is to have a general idea of how each works so that you’ll be able to have a better idea of “which” kind of life insurance product is most likely going to be the “best” for you.
It’s also why…
We chose to write this brief article all about Single Premium Whole Life Insurance policies so that you might have a better understanding of how they work and how much they might cost.
Single Premium Whole Life Insurance Rates
The following single premium whole life insurance rates are for informational purposes only and must be qualified for. Rates are from A rated carriers and above for a preferred plus male at the age shown. The dollar figure above represents how much one-time payment is required to qualify for the corresponding initial death benefit.
| Age | $15,000 | $25,000 | $50,000 | $100,000 |
|---|---|---|---|---|
| 40 | $43,577 | $72,921 | $155,927 | $312,324 |
| 45 | $37,790 | $62,238 | $135,223 | $270,853 |
| 50 | $32,920 | $55,089 | $117,796 | $235,976 |
| 55 | $28,780 | $48,161 | $102,983 | $206,276 |
| 60 | $25,369 | $42,453 | $85,163 | $181,830 |
| 65 | $21,484 | $37,776 | $75,781 | $161,797 |
| 70 | $18,411 | $33,996 | $68,197 | $145,607 |
Since these are whole life insurance rates, the death benefit will increase over time.
MEC Status
This is because SPL policies are generally considered to be MECs (modified endowment contracts). More on MECs to follow.
SPL policies can be whole life, indexed universal life or variable life insurance, with whole life policies offering a guaranteed growth of cash account value, with any growth in a variable life policy subject to the performance of the underlying subaccounts in which the cash value is invested.
MEC Taxation
An insurance policy which fails to pass a TAMRA 7-pay test is classified as a modified endowment contract due to cash contributions to the policy that exceed IRS limits. A major difference between MEC and non-MEC policies is the tax treatment of policy loans and withdrawals.
Policies classified as MECs are subject to last in first out (LIFO) taxation from the IRS, meaning that taxes must typically be paid on any withdrawals from a cash account that has grown in value.
In addition, if you withdraw funds from a MEC policy prior to the attaining age 59 ½, penalties for early withdrawal apply, similar to the penalties you would pay for early 401k withdrawals.
As with 401k accounts, in certain cases you can withdraw funds from a modified endowment contract before age 59 ½ without penalty, for instance in the case of a 72T provision.
Traditional participating whole life insurance policies, on the other hand, allow for policy loans or partial withdrawals on a tax and penalty-free basis up to the amount of your contributions to the policy.
SPL and Traditional Whole Life Similarities
Aside from tax treatment, MECs and traditional whole life insurance policies share many features.
Similarities between Single Premium Life Insurance and Whole Life include:
- A death benefit that is paid, typically free of taxes, to your beneficiary or beneficiaries
- Guaranteed growth of the cash value account
- If the policy if offered by a mutual life insurer you can earn dividends
- Funds in the cash account grow tax-deferred
- Funds can be withdrawn via policy loans or partial withdrawals
Why Choose Single Premium Life Insurance?
Given the disadvantages of a MEC as compared to a non-MEC policy from a tax standpoint, why would you want to buy a SPL?
Peace of Mind
One major reason, as previously mentioned, is the convenience and peace of mind created by owning a fully funded life insurance policy, which eliminates any fear of a policy lapsing at some point due to failure to pay premiums.
Savings Vehicle
Another advantage of a SPL is the ability of these policies to act as an alternate savings vehicle offering returns that are competitive to other tax-favored investments.
A SPL policy, in effect, functions like an annuity contract that includes life insurance protection.
As with a single premium immediate annuity, the most effective approach from a tax perspective is to avoid taking loans or withdrawals from such a policy until you reach age 59 ½. The same applies to any policy dividends, which may be taxable if taken in cash.
Potential Higher Returns
While traditional whole life policies also features cash account growth, in many cases a SPL whole life policy can provide better performance in terms of internal rate of return as compared to a standard policy with the same level of insurance coverage.
These policies typically can turn in a positive rate of return at least by the time the surrender charge has evaporated, if not sooner.
While SPL variable life policies have the potential to turn in performance that is better than single premium whole life insurance policies or cash equivalent accounts, they can also produce worse performance if the stock market declines due to their linkage to the market via equity-oriented subaccounts, making them a riskier choice from an investment standpoint.
Tax Deferral
SPL policies are often purchased by those who are seeking a policy that enables them to defer taxation and who don’t plan to take withdrawals from the policy before death.
If you plan to pass a significant sum on to your heirs or a charity, a MEC can be an efficient means of doing so.
Emergency Fund
Another reason for purchasing a MEC is to gain the security of paid-up life insurance with cash value you can access in a pinch.
Even if you have done a good job of setting aside money for retirement already, a MEC can provide access to emergency funds if they are needed, albeit with potential tax consequences and penalties for early withdrawal.
Living Benefits
Additionally, the availability in recent years of SPL policies with accelerated death benefit riders that contain long-term care benefits has made these policies attractive as a long-term care (LTC) option in place of long-term care insurance.
Such long-term care riders, which are subject to underwriting approval and may be unavailable in some states, usually enable you access to part of the death benefit upon the occurrence of certain events.
Living Benefit Riders may include:
- Chronic illnesses which leave the insured unable to perform 2 or more activities of daily living, therefore requiring continuous care.
- Diagnosis of terminal illness
- Specified medical conditions like cancer or potentially fatal cardiac disease
The ability to use a SPL as a combination life insurance policy/LTC rider solution with accelerated death benefits as well makes such policies truly flexible financial planning tools.
If you don’t require access to the LTC or accelerated death benefits such policies can offer, you can experience significant growth in your cash value account over time.
Whole life policies, especially dividend-paying policies offered by mutual life companies have typically performed quite well when compared against bank savings accounts and CDs in recent years in terms of internal rate of return.
On the other hand, if you experience medical emergencies or require long-term care, you can use a portion of the policy’s death benefit to deal with these conditions.
Furthermore, if you need access to your funds for any other reason, you can do so via a policy loan or partial withdrawal, as long as you are aware of the potential consequences in terms of taxes and penalties.
Financial Aid
Another advantage of a SPL is that such a policy can help a child qualify for financial aid.
Money held in an insurance policy, unlike funds contained in a 529 account, is not counted as part of the parents’ available assets when it comes to computing a child’s eligibility for financial aid.
MEC Alternatives
If the various advantages of a SPL cited above don’t overcome the disadvantages of holding a MEC, there are several ways to avoid owning a MEC without being required to make regular premium payments. These methods involve converting an existing lump sum, and include:
A 1035 exchange from another insurance policy or an annuity:
A 1035 exchange may work in certain cases, but, in many cases, is not the optimal approach, given that it is often better to change an old insurance policy rather than replacing it in order to reduce or end the need to continue making payments on it.
However, in cases where you have built up cash value in a policy that is not right for your current circumstances, such an option enables you to convert that policy to a SPL policy that will not be classified as a MEC if the original policy was not considered a MEC.
Whole life non-MEC pre-paid premium policies:
It is possible to establish a non-MEC policy with one or two “pre-paid” payments. Part of the payment is kept in an account sponsored by the life insurance company that pays interest and is then added to the policy at a later time to prevent the policy being designated as a MEC.
Using a bridge loan to fund a whole life policy:
This approach involves placing a lump sum into a bridge loan contract, or several such contracts, that pay out cash flow on a monthly basis. This cash flow is then used to buy a non-MEC whole life insurance policy.
This strategy is subject to factors such as your age and health, among others, and offers the potential to provide you with greater growth and flexibility than would be the case if you simply used the cash to purchase a MEC.
Now…
We know that we’ve discussed quite a bit here in this article about Single Premium Life Insurance. The good news is that we here at I&E don’t expect you to now be an expert on all of it.
All we hope…
Is that you’re now a “bit” more familiar with this type of life insurance policy and understand that it might be something you’ll want to consider for you and your family.
The next step…
Would be to simply give us a call and let us know what your goals are. This way we can help you determine if a SPL is right for you or perhaps you would benefit more from a variety of other different types of insurance coverage that might not require such a large initial investment.
So, what are you waiting for? Give us a call today and see what I&E can do for you!
