Single Premium Life Insurance: Is It Right For You? – Forbes Advisor

November 8, 2022

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Life insurance policies generally have regular, ongoing premium payments. Single premium life insurance policies are specifically designed to be financed with the payment of a single premium. you may be drawn to the features and benefits of single premium life insurance.

Maybe you are interested

Here’s what you need to know about single premium life insurance, including the costs and the pros and cons.

Reading: What is single life insurance

what is single premium life insurance?

A single premium life insurance policy allows the policyholder to make a single payment instead of monthly, quarterly or yearly payments. that lump-sum payment puts the policy into effect and policy beneficiaries receive a death benefit when the policyholder dies.

The amount of the death benefit depends on the size of the lump sum and the age and health of the policyholder. The younger and healthier the policyholder paying the lump sum, the higher the death benefit.

Almost any whole life, universal life, variable universal life or indexed universal life policy can be financed with a single premium, even if it is not officially sold as a “single premium life” policy.

but other life insurance policies are specifically sold with a premium payment. These single-premium life insurance policies provide a guaranteed death benefit for a specified period of years or age, depending on the policy.

related: best life insurance companies

what are single premium life insurance options?

Single premium products are available for all types of permanent cash value life insurance:

whole life insurance. the policy has a guaranteed dividend schedule. the insurance company may credit you with additional dividends, at its discretion.
Universal life insurance. Universal life insurance has a guaranteed interest rate. the insurance company may also credit a higher interest rate.
variable life insurance. there is no guaranteed earnings rate. Cash value is allocated to specific investments, called subaccounts. you can choose a fixed account that has a fixed earning rate for some or all of your cash value.
indexed life insurance. there is no guaranteed rate of return. cash value is assigned to specific indexed accounts. you can choose a fixed account that has a fixed earning rate for some or all of your cash value

pros and cons of single premium life insurance

Like any life insurance policy, single premium life insurance has its positives and negatives.

advantages of single premium life insurance

You don’t have to worry about making future payments. One payment and done.
A single premium life insurance policy can provide cash value, which accumulates over the life of the policy.
Permanent life insurance companies often offer life insurance with living benefits that allow you to take advantage of the cash value of a policy while you are alive.

disadvantages of single premium life insurance

Many people cannot afford a large lump sum that can provide a generous death benefit.
A single premium life insurance policy is considered a modified endowment contract, which may carry tax penalties when you withdraw or borrow the cash value of the policy.
You can’t add money to the policy later. Let’s say you end up inheriting $500,000 and you want some of that to go toward life insurance. you can’t add to a single-premium life insurance policy, so you’d have to invest that money some other way.

Who might need single premium life insurance?

Single premium life insurance may be a good option for life insurance buyers with certain situations such as:

when guarantees are important

Single premium life insurance policies have guaranteed cash values and death benefits. insurance companies may credit additional interest or dividends.

if you have a child with special needs

The death benefit can be used to fund a special needs trust to provide a lifetime income for a child or other dependent.

for estate planning

A single-premium life insurance policy can be useful when heirs may face an estate tax and the policyholder would benefit from transferring assets out of their estate. this should only be done in consultation with a qualified estate planning attorney.

when replacing an existing life insurance policy

A single-premium life insurance policy can be funded through an IRS Section 1035 tax-free exchange of the cash value of an existing life insurance policy. this is useful when the policyholder does not want to make any more premium payments but wants to keep a life insurance policy in force.

who shouldn’t buy single premium life insurance?

Here are some reasons why you wouldn’t buy single premium life insurance:

high premium

The minimum single premium is usually at least $5,000. If you need a large life insurance policy, your single premium payment will be significant.

premium prepayment

If you die earlier than expected, you could have paid a significantly lower annual premium if you had opted for regular premium payments.

no additional contributions are allowed

You cannot pay additional premiums to the policy.

limited access to cash value if you change your mind about the policy

Life insurance policies often have surrender charges for the first few years.

penalties for early withdrawal

Single premium life insurance policies are generally classified as a modified endowment contract (MEC). A MEC has a 10% income tax penalty on withdrawals above cost basis before age 59 1/2. this income tax penalty also applies to policy loans.