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.

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.

• A single-premium life insurance policy is one in which the policyholder pays the premium all at once rather than in monthly, quarterly, or annual installments.
• Its common type includes single-premium whole life insurance and single-premium variable life insurance.
• The death benefit amount associated with the policy depends on factors like the value of the lump sum and the policyholder's age and health status.
• Its main characteristics are high premiums, prepayment of premiums as a single amount, and early withdrawal penalties.

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. 
• Best single premium life insurance 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 of best single premium life insurance 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.

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.

Let us look at single premium life insurance policy 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.

From the cost point of view, this kind of single premium life insurance policy proves to be overall costlier as compared to regular insurance plans. This is a serious disadvantage, which experts have identified over time. Let us explain it.

In case of a regular plan, the premium paid annually is less, which covers the policyholder for fixed time period and during any unfortunate incident, the beneficiary will get the sum assured in lumpsum.

But in case of single premium, for the same life cover amount and same term of insurance, the premium paid is much more, since it has to be paid only one time. Therefore, this becomes beneficial only if there is no unfortunate incident during the policy lifetime. If the policyholder dies before that and insurance is claimed, the amount received is same as a regular policy, but the premium paid is much more.

However, single premium life insurance plans are to be noted that in spite of the high cost, it has continued to remain in the insurance market due to their tax savings criteria. However, salaried people only sometimes prefer it due to the affordability problem.

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.

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.
• It is extremely suitable for people who have sudden access to a large amount of fund or pool of money suddenly inherited or a similar situation. This kind of policy can be easily afforded by them and takes away the tension of securing the near and dear ones for the future as well as payment of repeated premium every year.   
• Even people who are business owners and have made some irregular income and would like to use single premium life insurance plans for some useful purpose can opt for this kind of insurance.

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). 
• It has been noticed by financial expert that this type of insurance ultimately costs more than the regular ones, as already explained in the costing part of the article, which will happen in case the policy holder expires within a few years of opting for the policy.

Thus, the above are some noteworthy advantages and disadvantages of the concept. Insurance buyers should keep track of these pros and cons in order to understand what type of insurance will suit them best, as per their requirements and affordability. It is always a great idea to take help and advice from professionals, who are experts in such fields and will be able to guide appropriately with their updated knowledge.

This article has been a guide to what is Single-Premium Life Insurance. We explain the cost and taxation along with types, examples, pros and cons. You may also find some useful articles here -

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