Single Premium Life Insurance – Everything You Need to Know

Estimated reading time: 11 minutes

Single premium life insurance offers a policy with guaranteed death benefits for a one-time payment. You pay a single lump sum upfront, then never have to worry about it again.

Quick Summary

Single premium life insurance (SPL) provides living benefits, like funds for long term care, as well as a guaranteed death benefit to your beneficiaries. It requires the purchaser to have a sizable amount of cash on hand to fully fund the policy. The IRS also considers it a MEC.

Reasons to Choose an SPL

SPLs come with advantages for people who do have the cash flow to make large purchases like this. They can solve many estate planning, LTC (Long Term Care), and tax problems.

Estate Planning

Estate planning seems to get trickier every year. With the costs and time involved with probate, life insurance can get money to your heirs fast by skipping all of the legal red tape.

Many families take advantage of a single premium policy to enhance the transfer value of their estate through tax-free life insurance benefits.

Long Term Care Funds

All SPLs are permanent life insurance. These come with a cash value accumulation feature. Plus, since you’re fully funding the policy upfront it has both the time and principal to grow quickly. This leads to the ability to borrow against the cash value to support long term care expenses.

Tax Shelter

Since the benefits transfer tax-free to your beneficiary, this can dramatically reduce the amount Uncle Sam takes out of your estate. The cash value accumulation also grows tax-deferred.

Is an SPL Right for Me?

Unlike other forms of life insurance, this one is pretty easy to determine without expert help. Although double-checking your choice with a financial advisor, insurance agent, or estate lawyer is always a good idea. Ask yourself the following questions.

• Do you have liquid assets (cash) that you don’t need for everyday living to pay for the premium?
• Do you plan to pass these assets on to loved ones?

This is just one way to transfer wealth between generations. A traditional multi-pay life insurance policy will do the same thing. If you have the wealth and time to grow a cash value, an indexed universal life policy might also serve you well.

When you purchase a life insurance policy to transfer wealth, you’re decreasing the assets in your estate. The life insurance passes on to your heirs without the estate tax burden.

How Much Life Insurance Will Your Premium Buy?

Most people use SPL to increase the amount of money they are leaving to their heirs or charity. For example, maybe you have $50,000 you have to leave to your kids. Instead of leaving $50,000 in cash, you can put that money into a SPL. Then your $50,000 premium could become a $150,000 death benefit to your heirs.

To get an idea of what your premium will buy, complete the quote form on this page. Then, we’ll shop the insurance companies to find you the best policy for the premium paid.

Types of Single Premium Life Insurance

You have options if you prefer a type of permanent life insurance. While most SPL is whole life insurance, variable life and universal life also exist.

Whole life has a fixed cash value growth – usually around 4%. This is best for fiscal conservatives and anyone who doesn’t want to stress about possible value loss or stagnation.

Variable life gives you the ability to put your cash value into a variety of professionally managed funds and receive direct returns.

Universal life ties your cash value to a fund that the insurance company chooses. It’s not directly invested, so you’re exposed to much less risk.

IRS Information

Decades ago, single premium life insurance was one of the primary tax shelters for the wealthy. Congress tried to curtail this with the Tax Reform Act of 1986.

When that didn’t have the desired effect, they passed the Technical and Miscellaneous Revenue Act of 1988 to discourage using life insurance as tax shelters. This legislation reclassified SPL as Modified Endowment Contracts.

Now, all single life premium policies are legally MECs. 

What is a Modified Endowment Contract?

MECs grant loans and withdrawals on a “last-in-first-out” basis. It changes the way funds come out of the policy, so the taxable gains are what come out before the tax-free principal return.

With that in place, it pushed people to move their money into permanent multi-pay life insurance instead.

Benefits of Single Premium Life Insurance

Even classified as a MEC, single premium life still has enticing benefits to consider.

Fully Funded Policy

The single payment fully funds the policy. That allows faster cash value accumulation and frees you from needing to worry about ever paying premiums again.

Creates an Estate for Heirs (or Charity)

While some people choose to leave the benefits from their SPL to charity, most people leave the cash to their heirs to create inter-generational wealth. Even if taxes eat up the value of your estate, the life insurance benefits won’t be touched.

Cash Value Accumulation Builds Fast

The larger the single premium, the larger the cash value accumulation portion becomes. Large principals mean faster growth. Like with all wealth-building vehicles, the more time you have to let it grow, the bigger it gets.

Fully funded policies like this grow their cash value faster than other life insurance policies with similar face amounts.

Grows Tax-Deferred

Even with the last-in-first-out rule, you don’t pay anything until you borrow against the policy. The cash value grows tax-deferred.

Tax-Free Access to Long Term Care Expenses

This only applies to some policies, but insurance companies are coming up with increasingly creative ways for people to pay for long term care without emptying their life’s savings. A few insurers have SPL policies that allow tax-free access to your death benefits to pay for long term care.

The details differ between companies, but this will draw down your death benefits. Any amount remaining will then be passed on tax-free to your heirs. 

Drawbacks of Single Premium Life

Comparing the drawbacks of different types of life insurance policies is an excellent way to determine what would best fit your family. 

It’s an MEC

The MEC classification puts a big damper on the benefits of having a cash value accumulation on your life insurance. 

Cost-Prohibitive for Many

The premium payment on an SPL is too high for most families in the United States. The smallest premium possible is $5,000. 

Additions Prohibited

Once you have the SPL in place, you can’t add more premium later to improve either the death benefit or the cash value accumulation. However, you can add additional life insurance policies in the future if you have the cash to do so.

SPL Withdrawal Options

You can withdraw cash from the policies in two ways. 

First is the loan against the cash value. Most companies will allow a loan up to 90% of the surrender value. This reduces both the surrender value and death benefits.

Insurers will allow you to withdraw funds directly from the cash surrender value. They limit the minimum you can remove to the greater of 10% of the premium paid or 100% of the policy’s gains. 

Beware of IRS Penalties

The IRS will take 10% of your loan or withdrawal until you’re 59.5. On top of that, you’ll pay income tax. 

Cashing in the policy will also penalize you with surrender charges from the insurer itself. 

How Single Premium Life Insurance Works Step-by-Step

A single premium life insurance policy begins with one lump-sum payment that immediately funds the entire policy for the rest of your life. This structure removes the need for ongoing premium payments and creates instant leverage for estate planning, tax benefits, and long-term financial stability.

1. You Make the Initial Payment

With a single premium life insurance policy, the initial payment is the only required contribution. This lump-sum payment activates lifetime coverage on day one. Since there are no annual premiums, this approach appeals to people who want simplicity and guaranteed protection.

2. The Policy Creates an Immediate Tax-Free Death Benefit

Your single premium payout is converted into a larger death benefit. The insurer sets an interest rate based on the type of coverage, and the benefit passes to your heirs free of income tax. This makes single premium policies a powerful wealth-transfer tool.

3. The Cash Value Account Begins Growing Right Away

Because the entire policy is funded upfront, the cash value account builds quickly. Growth depends on the product design, such as single premium whole life insurance or universal life options, and can be tied to fixed, indexed, or market-linked rates. These tax advantages allow the cash value to compound efficiently.

4. Access to Living Benefits and Policy Loans

A single premium life insurance policy may allow:

• Policy loans for liquidity needs
• Withdrawals subject to Modified Endowment Contract tax implications
• Accelerated benefits for chronic or terminal illness

Remember that most single premium policies automatically fail the seven-pay test, which classifies them as MECs. This affects taxation on loans and withdrawals, but does not impact the tax-free death benefit.

5. Your Beneficiaries Receive a Guaranteed, Probate-Free Payout

When you pass away, the remaining benefit transfers directly to your heirs without probate delays. A single premium payout ensures your family gets fast, predictable financial support.

Single Premium Life vs. Traditional Life Insurance

Understanding the difference between single premium life insurance and traditional life insurance policies helps you choose which structure best fits your goals.

Premium Structure

• Single Premium Life Insurance: One lump-sum payment funds the entire policy for the rest of your life.
• Traditional Life Insurance Policies: Require annual premiums or monthly payments that continue for years or decades.

If you prefer simplicity and want to avoid long-term payment obligations, SPL is the better fit.

Cash Value Growth

• Single Premium Policies: Cash value grows quickly due to the full initial funding and favorable interest rate structures.
• Traditional Term Life Insurance: Has no cash value and expires after a set period.
• Traditional Whole or Universal Life: Builds cash value slowly because premiums drip in over time.

Tax Implications

• Single Premium Life Insurance: Automatically becomes a MEC under the seven-pay test, impacting taxation on loans and withdrawals.
• Traditional Life Insurance: Can be structured to avoid MEC status, making withdrawals more tax-friendly.

If tax-free access to cash value is a priority, traditional life or IUL may be better. If maximizing tax benefits at death is your priority, SPL excels.

Risk and Flexibility

• Single Premium Whole Life Insurance: Offers lifetime coverage, predictable growth, and strong guarantees.
• Traditional Life Insurance: Offers flexibility in payment structure and a variety of coverage designs.

Who Each Type Is Best For

• Single Premium Life: Individuals with assets to reposition, those seeking tax-efficient wealth transfer, or retirees wanting coverage without ongoing premium payments.
• Traditional Life Insurance: Families needing income protection, people who prefer spreading costs over time, or anyone choosing term life insurance for affordability.

How to Use Single Premium Life in Estate Planning

A single premium life insurance policy is a strategic asset for people looking to enhance their legacy, reduce taxes, or create guaranteed liquidity for heirs.

1. Avoiding Probate and Delays

Life insurance proceeds typically bypass probate. This means your beneficiaries receive their inheritance faster and without legal complications. A single premium payout ensures immediate liquidity.

2. Maximizing Wealth Transfer

By turning a lump-sum payment into a larger death benefit, single premium whole life insurance can dramatically multiply the amount you leave behind. The tax benefits amplify this advantage, giving your heirs more than they would receive from a simple bank account transfer.

3. Reducing Estate Taxes

Repositioning taxable assets into life insurance offers considerable tax advantages. While cash in your estate may face taxation, the death benefit of single premium policies typically does not. This reduces the financial burden on your heirs.

4. Access to Long-Term Care and Terminal Illness Benefits

Many SPL policies allow early access to the death benefit when long-term care or terminal illness strikes. This provides flexibility without jeopardizing your estate plan.

5. Charitable Giving Strategies

Single premium life insurance allows donors to turn a modest initial payment into a much larger charitable contribution. This is often used to support:

• Faith organizations
• Foundations
• Schools and universities
• Community nonprofits

It is one of the most efficient ways to make a lasting impact.

Conclusion

Single premium life insurance is one of the best ways to ensure that your wealth will transfer to the next generation. It’s designed specifically to leave money to heirs while avoiding both taxes and lengthy probate processes. 

It’s the type of policy that makes the most sense when you’re doing estate planning and have extra liquid assets you’d like to pass on. 

How Abrams Insurance Solutions Can Help

We’re a small group of independent insurance agents dedicated to helping families create stable financial foundations, of which life insurance is one part. Whether it’s estate planning to create inter-generational wealth or finding the peace of mind that comes with knowing your spouse and kids will be okay if the worst should happen, we’re here to guide you through that process with a policy tailored to your unique situation.

If you have any questions about single premium life insurance, give us a call at (858) 703-6178 today. We are happy to help, and there is never any obligation to move forward.