When buying pricey things, you typically finance it or pay with cash. This happens with big purchases – like buying a car or home. The same thing can happen with life insurance. The majority of people pay their life insurance premium either monthly or annually. However, you also have the option to buy it with a single payment payment. When you purchase a Single Premium Life Insurance policy – you’re buying it with a single cash payment.
What is Single Premium Life Insurance?
Single premium life insurance is a type of life insurance policy that you pay for in a single payment.
- Single-premium life insurance gives you an immediate guaranteed death benefit.
- Your beneficiaries receive the death benefit if you were to die.
- The cash value from your payment will grow quickly with a single-premium life insurance policy.
- The cash value builds quickly because the SPL is fully funded.
Types of Single-Premium Life Insurance
There are actually three types of single premium life insurance available to you. You can purchase a universal, variable and whole life insurance policy. Each of them can be bought with a single payment. Each of these SPL policies provide different investment choices.
Single Premium Whole Life
1. Single-Premium Whole Life insurance will pay a fixed interest rate. The interest rate is based on the conditions of the economy as well as the life insurance company’s investments. Single premium whole life is regarded as the safer choice and less risky.
Single Premium Variable Life
2. Single-Premium Variable Life insurance provides you the ability to choose from a variety of stocks, bonds and money market sub-accounts. The cash value in the policy grows at a variable rate. The growth depends on how you choose to invest it. You also have the option of a fixed account. Typically, you’ll be able to choose the options provided by the company, but you won’t be actively controlling these investments.
Single Premium Universal Life
3. Single-Premium Universal Life insurance is considered a “best of both worlds” type of life insurance policy. It provides you with lifetime insurance, but at a lower cost compared to other permanent products. UL is different than whole life because it provides coverage until an age you choose. The universal life policy can cover to age 90, 95, 100, 105, 110…all the way to age 121.
Single Premium Life Insurance Quotes
Here are samples of single premium Universal Life quotes. We ran quotes for a healthy non smoking 40-year-old-man at “Preferred Best” rates. Our single premium life insurance calculator generated the Guaranteed Universal Life quotes below. Quotes were calculated for both annual and single premium life insurance.
- The table illustrates the potential long term savings of paying with a single premium payment vs an annual payment.
- These quotes are for comparison purposes only as rates are subject to change.
| Coverage | Single Premium Payment | Annual Payment |
|---|---|---|
| $100,000 | $16,017 | $672 |
| $250,000 | $37,380 | $1,570 |
| $500,000 | $72,985 | $3,065 |
| $1,000,000 | $136,660 | $5,840 |
Annual vs. Single-Premium Life Insurance Savings
As you can see from the chart above, single premium life insurance isn’t cheap. Is it a better deal compared to paying an annual premium? Let’s compare the two premium payment modes and find out.
Since the average person is expected to live to age 79, we’re going to simply round up to age 80. Our 40-year old man can expect to pay annually for the next forty years. Let’s take his annual payment and multiply them by 40 years and see how much he can save.
| Coverage | Single Premium | Annual Payment x 40 Years | Total Single Premium Savings |
|---|---|---|---|
| $100,000 | $16,017 | $672 x 40 = $26,880 | $10,863 |
| $250,000 | $37,380 | $1,570 x 40 = $62,800 | $25,420 |
| $500,000 | $72,985 | $3,065 x 40 = $122,600 | $49,615 |
| $1,000,000 | $136,660 | $5,840 x 40 = $233,600 | $96,940 |
As you can see in the table above, you’re going to save a lot of money if you choose a single-premium life insurance policy. It may be something to consider if you are able to afford the SPL.
Pros and Cons of Single Premium Life Insurance
There are advantages and disadvantages with every type of life insurance policy. Let’s look at the pros and cons of single-premium life insurance.
What we like about Single-Premium Life Insurance
There are many benefits of single premium life insurance
1. Single Premium
This may see obvious considering it’s called single premium life insurance. With a single payment – you’ll never have to worry about another future premium payment. Your death benefit will be guaranteed immediately. What a relief!
2. Accelerated Death Benefit
There are many single-premium life insurance policies that provide an accelerated death benefit. This life insurance rider allows you early access to your death benefit if you’re diagnosed with a terminal illness.
3. Cash Value
Your policy will grow cash value over time. With single premium life insurance – the cash value grows quicker compared to a traditional whole life policy that is paid monthly or annually.
What we don’t like about Single-Premium Life Insurance
There are definite disadvantages to single premium life insurance.
1. Price
It’s pretty obvious that a single premium life insurance policy comes with a hefty price tag. For most people, an SPL is simply unaffordable. However, if you can afford an SPL, it provides great savings over the life of your policy.
2. Underwriting
If you decide to apply for a single-premium life insurance policy, you’re going to have to take a medical exam. SPL policies are fully underwritten life insurance policies. This means you’ll have to schedule and complete a medical exam that the company pays for. It’s similar to an annual physical where you provide a urine sample and blood test. If you don’t hate needles, this isn’t that big of a deal.
3. Potential Taxes and Losses
Permanent life insurance policies sometimes come with an investment risk. The money that grows in your policy is not taxed. However, the profits can be when you withdraw money before you pass away.
4. MEC
One of the biggest things we hate about single premium life insurance policies is that they’re considered a MEC. A modified endowment contract has some downsides like taxes for policy loans or withdrawals. If you’re thinking of an SPL for short term cash value growth, you may want to consider another policy. Let’s dive a little deeper into the MEC.
What is a modified endowment contract?
A modified endowment contract is a type of life insurance tax qualification. It’s when a policy has been funded more cash that the federal tax laws allow. When a life insurance policy has become a MEC — it is no longer viewed as life insurance by the IRS. The IRS then considers it a modified endowment contract. Once your life insurance policy is viewed as a modified endowment contract, it can no longer be reclassified as a traditional life insurance contract.
You’re probably wondering why did the federal government did this? Simple put, they did this to eliminate people using life insurance policies as a tax shelter. A single premium whole life insurance policy is considered a MEC if it began after 6/20/1988. It’s considered a MEC because it exceeds the IRS “7 Pay Test” limit. In other words, it exceeds the limit for the total amount of money the policyholder can put in their life insurance policy.
Single-Premium Life Insurance Questions
Still wondering if a single premium life insurance policy is right for you? Choosing the right policy can be a bit confusing and stressful. Don’t worry – at Life Insurance Blog we’re ready to help.
Our independent life insurance agents aren’t trying to meet sales quotas or push you towards any particular company. We have relationships with the best life insurance companies in order to find the right one for you. In fact, we have access to over 60 carriers. We have no doubt that we’ll find the best life insurance company for you.
Would like to receive a free accurate quote based on your specific health, lifestyle and age? We’ll provide you help with quotes as well as the type of policy and amount of insurance you’re needing. Just give us a call today.
