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.
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.
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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 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.
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.
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 chose 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.
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 a 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.
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.
3 Best SPL Companies
We picked these companies because they offer the most comprehensive policies, they have a good reputation within the industry, and they all have good ratings from the financial rating companies like AM Best.
Assurity offers its SPL to people as young as 15 days old. They break down what’s available within their SPL policy by age.
The minimum limits are:
- 15 days to age 54 – $10,000 in benefits
- Age 55 to 85 – $5,000 in benefits
The maximum face amount for their No Exam SPL is also broken down by age.
- 15 days to age 60 – $700,000 in benefits
- Age 61 to 85 – $450,000 in benefits
The rest of the features are pretty standard for a whole life SPL. The cash value accumulates interest, which you can borrow against at any time for any reason.
The rider they include for no additional premium (Accelerated Death Benefit Single Premium Insurance Rider) allows you to take out some of your death benefits in the event you are diagnosed with a terminal illness.
Sagicor offers a Fixed Indexed Single Premium Whole Life (FISPWL) policy. They’ve worked hard to offset many of the typical downsides associated with SPL type policies.
The minimum single premium amount is $5,000. Anyone aged 18 to 85 can qualify for this policy. They also throw in a bonus of 10% of your premium into the policy when they issue it.
Through Sagicor’s accelerated underwriting process, they can issue this policy in minutes without the need for a telephone interview or agent meeting. In some cases, they’ll require more time to review medical records, but for most people, it’s fast.
They have two major guarantees that make their policy particularly attractive. First, the minimum guaranteed interest is 2%. Second, they include a return of premium guarantee. This states that if you surrender your policy for any reason, you get 100% of your initial premium back. Of course, they’ll subtract any outstanding loans, withdrawals of accelerated benefits from your premium.
Finally, you can get a loan against the cash value of the policy any time, for any reason, after the first year.
SBLI offers a single payment option as part of its Flex Whole Life insurance policy. They offer the Accelerated Death Benefit rider free with the plan. However, it’s the only rider available on the single-pay option – like other companies with SPL offerings.
The available benefits range from $5,000 to $500,000 and can be issued to anyone between 15 days old and 80 years. The policy lasts until age 121, at which point, if you’re still living, SBLI will pay you the face amount.
They recommend this policy specifically for the intention of leaving money to heirs while avoiding taxes and probate.
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.