What Is Single-Premium Life Insurance?

Single-premium life Insurance policy refers to an insurance type in which the policyholder makes only a single payment as a premium rather than on monthly, quarterly, or yearly payments. The one-time premium payment activates the policy, and the beneficiaries receive death benefits when the policyholder dies.

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It involves paying a lump sum payment as a premium, and the death benefit amount depends on multiple factors like the value of the lump sum and the policyholder’s age and health status. For example, if the policyholder is young and healthy, the estimated death benefit will be higher than that of an old and unhealthy policyholder.

Single-Premium Life Insurance Explained

An SPL Insurance Policy is a policy funded with a single insurance premium. It provides guaranteed cash values, death benefits, and additional interest or dividends depending on the insurance seller. Furthermore, its main characteristics include the following:

• High premiums
• Prepayment of premiums as a single amount
• No other contributions or premium payments are allowed
• Early withdrawal penalties

There are different scenarios emphasizing the relevance of an SPL insurance policy. For instance:

• A special needs trust or supplemental needs trust that will give a child or other dependant lifetime income can be funded using the death benefit associated with the SPL insurance policy. 
• It is also a technique enabling the transferring of assets out of the policyholder’s estate when heirs may face an estate tax, and the policy owner would benefit by moving investments out of their estate.
• An IRS section 1035 tax-free exchange of the cash value from an existing life insurance policy can be used to fund an SPL insurance policy. It is useful when the policyholder wants to maintain a life insurance policy in effect but does not want to continue paying further premiums.
• Another service is the provision of wash loans, which are loans secured by the cash value of insurance policies and are technically interest and tax-free because the interest rate on the cash value offsets the interest on the loans.

Types 

There are different types of SPL insurance: 

• Single–premium whole life insurance involves paying a fixed interest rate based on the insurance company’s investment experience and current economic health.

• Single–premium variable life insurance: In this type, the benefit amounts are based on the performance of the underlying securities.

Examples

Let us look at single-premium life insurance examples to understand the concept better: 

Example #1

Chris, a 57-year-old man who spends $200,000, might be able to obtain a single-premium life insurance policy with a death benefit of $3,50,000. Then, at death, his beneficiaries would be eligible to claim the death benefit—typically without any income tax owed.

Example #2

A 30-year-old man in good health could invest $100,000 in a life insurance policy with a single premium and get a death benefit of $300,000. But if a 60-year-old with comparable health invested $100,000, they might get a death benefit of $150,000 rather than just $300,000.

Taxation

SPL insurance is an example of a tax shelter since it offers attractive tax advantages. It allows the policyholder to convert a large sum into a single premium investment for a policy and attain interest- and tax-free loans against the policy.

The Technical and Miscellaneous Revenue Act of 1988 categorized SPL insurance plans as modified endowment contracts (MECs). MECs come with tax penalties for making a withdrawal or loan from the policy’s cash value. MECs use last-in-first-out (LIFO) to provide loans and dispense withdrawals. As a result, the value of the insurance as a tax shelter is diminished since taxable gains leave the policy before the tax-free return of the principal.

Pros And Cons

Let’s look into the pros and cons of single-premium life insurance:

Pros

• The fact that no recurring premium payments are necessary is a significant advantage of SPL insurance. In other words, no further payments shall be made to the insurer after the lump sum payment.
• Companies that provide permanent life insurance frequently offer life insurance with living benefits, which lets people access the cash value of a policy while still alive.
• To pay for long-term medical costs, policyholders might borrow against their policies. If the policyholder is found to have a terminal illness, life insurance companies may also offer a lump amount or ongoing payments.

Cons

• Some individuals may find it challenging to pay a lump sum premium upfront. 
• The policy might not have enough time to appreciate if the insured dies sooner than anticipated.
• The tax penalty for withdrawing or borrowing money from the policy is an additional problem with modified endowment contracts (MEC). 

Frequently Asked Questions (FAQs)

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This article has been a guide to what is Single-Premium Life Insurance. Here, we explain its types, examples, taxation, pros, and cons. You may also find some useful articles here –

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