A Look at Single-Premium Life Insurance
The primary benefit of life insurance is the creation of an estate that can provide for survivors or donate to charity. SPL is a type of insurance in which a lump sum of money is paid into the policy in exchange for a guaranteed death benefit until you die. Here we look at some of the various versions of SPL that are available, each with its own set of investment options and withdrawal provisions.
Because the policy is fully funded, the cash invested in single-premium life insurance grows quickly. The size of the death benefit is determined by the amount invested as well as the insured's age and health. A younger person is calculated to have a longer remaining life expectancy by the insurance company, giving the funds paid in the premium more time to grow before the death benefit is expected to be paid out.
Naturally, the greater your initial capital contribution to your policy, the greater your death benefit. For example, a 60-year-old female may use a $25,000 single premium to provide her beneficiaries with a $50,000 income-tax-free death benefit, whereas a 50-year-old male's $100,000 single premium may result in a $400,000 death benefit.
Living Benefits of Single-Premium Life Insurance
While insurance policy death benefits are an efficient way of providing for your dependents, you should also consider any unexpected needs that may arise before you die. You're probably aware of the significance of long-term care (LTC) insurance, as long-term care can be an expensive situation. But what if you can't bear the thought of paying the annual LTC premiums? SPLs can provide a solution.
Some SPL policies allow you to use the death benefit to pay for long-term care expenses tax-free. This feature can assist in protecting your other assets from the potentially crippling cost of long-term care. When you die, the death benefit remaining in the policy is tax-free to your beneficiaries. And if you don't use any of it, the money will be distributed to your loved ones as planned. As a result, your SPL plan enables you to cover your long-term care needs as needed while still leaving the maximum amount of your death benefit intact for your dependents.
A number of SPL plans also allow you to withdraw a portion of the death benefit if you have a terminal illness with a life expectancy of 12 months or less. This flexibility can make the decision to pay a large single premium less intimidating, and it is something to think about if you have limited financial assets outside of your SPL.
Investment Options With SPL Policies
There are two popular single-premium policies that provide various investment options:
- A fixed interest rate is paid on a single-premium whole life policy based on the insurance company's investment experience and current economic conditions.
- A single-premium variable life insurance policy allows policyholders to choose from a menu of professionally managed stock, bond, and money market sub-accounts, as well as a fixed account.
Your decision should be based on your ability to deal with market fluctuations, the composition of the other assets in your portfolio, and how you intend to use the policy's cash value. You can rely on the safety and stability of a constant growth rate in your policy with a fixed interest rate, but you miss out on potential gains if the financial markets perform well. The minimum death benefit is set when you buy the policy, but if the policy's account value rises above a certain threshold, the death benefit can rise as well.
A variable life insurance policy with sub-accounts invested in equities and bonds, on the other hand, may make more sense if you are willing to risk underperformance for the possibility of higher returns.
Withdrawal Options
SPL policies give you control over your investment by allowing you to withdraw cash for emergencies, retirement, or other purposes. A loan is one way to access the cash in the policy. In most cases, you can borrow up to 90% of the cash surrender value of the policy. This will, of course, reduce the cash surrender value and death benefit of the policy, but you can repay the loan and reinstate the benefit.
Companies will also allow you to withdraw funds and deduct the amount from the cash surrender value of the policy. There is usually a minimum amount that can be removed. The maximum amount you can withdraw without paying a surrender charge each year could be 10% of the premium paid in or 100% of the policy's gains, whichever is greater.
However, because SPL policies are typically considered modified endowment contracts, withdrawals or loans from your SPL may incur additional fees. This means that all gains withdrawn or borrowed before the age of 59½ are subject to a 10% IRS penalty. Profits will also be subject to income taxation. Furthermore, if you cash in the policy, the insurance company may levy a surrender charge.
Investment Grows Tax-Deferred
Within the policy, your investments will grow tax-free. As previously stated, if you withdraw or borrow from the policy, you will be taxed on the earnings, but your named beneficiaries will receive the benefits tax-free and without the time and expense of probate. This is an important benefit because you do not want the time and money you put into providing death benefits for your dependents to be undermined by unnecessary time delays and probate costs.
SPL Has Drawbacks
The minimum amount you can invest in an SPL policy is typically $5,000, which can be prohibitively expensive for many investors. Additions are not permitted. You should only consider using funds that you intended to leave to future generations or to help fund a long-term goal, such as retirement. In order to qualify for SPL, you must also meet the insurance company's medical underwriting standards.
Frequently Asked Questions
Why Buy a Single-Premium Life Insurance Policy?
The buyer makes a single, up-front premium payment to fully fund the policy, ensuring the beneficiaries of a substantial death benefit right away. Investing grows tax-free.
Do SPLs Finance Long-Term Healthcare Benefits?
Some single-premium life insurance policies can help pay for long-term care if the insured needs it. Some single-premium life insurance policies allow policyholders to use the death benefit to pay living expenses tax-free. Such withdrawals reduce the amount of the death benefit in proportion.
How Does an SPL Policyholder Tap Their Cash?
SPL policies provide cash value access for emergencies, retirement, or other opportunities. Loans are one method of obtaining funds. Loans up to 90% of the cash surrender value of the policy are typically available. This will, of course, reduce the cash surrender value and death benefit of the policy, but you can repay the loan and reinstate the benefit.
The Bottom Line
If you have money that you don't need right now but want guaranteed life insurance protection for your family or a favorite charity, single-premium life insurance may be the best option for you. It's also a great way to start a child's life insurance programme.
For example, you could name a child or grandchild as the insured while keeping the policy in your name. You would still have control over the cash value this way. You could also make them the owner to remove the policy from your estate. If you choose to use a single-premium life insurance policy, keep in mind your personal financial situation as well as any other retirement vehicles you already have in place so you can select and shape your policy to best meet your needs. Additionally, compare single-premium plans from various companies to ensure you get the best life insurance policy possible.