More on Life Insurance
More on Life Insurance
Single-premium life insurance (SPLI), also known as prepaid life insurance, is a form of permanent life insurance. Instead of paying a premium in monthly or annual installments as you would with other kinds of life insurance, you pay for the policy up front to secure a death benefit until you die. As with other forms of permanent insurance, your premium funds both the death benefit and a cash value amount.
There are three types of SPLI:
Single-premium whole life insurance
Single-premium variable life insurance
Single-premium universal life insurance
The size of the death benefit depends on your payment amount, age at the time of application, and overall health. The cash value of a single-premium policy grows over time and can be borrowed against in the form of a policy loan.
Single-premium life insurance isn’t recommended for most people, but if you have cash available to pay the expensive premium upfront and are looking for a permanent life insurance policy, single-premium life insurance is the best way to ensure you never miss a payment.
You’re guaranteed a death benefit payout with single-premium life insurance
The first and only premium payment can start at $5,000 or more
Single-premium policies – whole, universal, or variable life – come with a cash value that accrues interest over time
You can withdraw money from a single-premium policy but it may be subject to taxes and penalties
Single-premium life insurance policies offer permanent coverage, guaranteeing that no matter when you die, your beneficiaries will receive a death benefit. It differs from traditional whole life and term life insurance, both of which are paid in monthly or annual installments rather than in one large sum. Single-premium life insurance, like other permanent life insurance policies, provides protection for the rest of your life, while term life insurance expires after a set number of years (the term).
The cash value of prepaid life insurance functions similarly to an investment account since it grows tax-deferred as long as the policy is active. You can draw upon the cash value before you die or take out a policy loan, both with some restrictions.
There are three common forms of prepaid life insurance, which differ mainly in how insurance providers treat the cash value. All prepaid policies cover you for the rest of your life and provide a set death benefit after you die.
How the cash value component accrues interest and how much it’s likely to grow depends on the level of investment risk involved, and whether the insurer guarantees a certain amount of growth in the policy.
Single-premium whole life insurance (SPWL) includes a cash value that grows at a fixed rate set by your insurer. Many insurers will guarantee a minimum rate of return on your investment. This rate is generally lower than a standard investment account like an IRA or 401(k), but higher and less variable than the rate of growth in other single-premium policies.
If you’ve decided single-premium life insurance is for you, SPWL is the better option for most people because it’s a more reliable alternative investment account. But we strongly recommend using more traditional investment vehicles as your main source of retirement savings over cash value life insurance, which has limited investment options and relatively low rates of return.
Single-premium variable life insurance offers options for investing your cash value. The choices differ by provider, but can include index funds, money market accounts, or bond portfolios. You cannot actively manage the investment yourself, and you will need to pay management fees to your insurer, which acts like a financial advisor or money manager.
Single-premium variable life insurance presents the greatest risk compared to other types of SPLI since the cash value of your policy is subject to market volatility with no guaranteed return. But it also presents a greater potential reward if your cash value grows at a higher rate, which is set by the provider in an equivalent single-premium whole life policy.
Unlike single-premium whole life, which covers you for a set number of years, single-premium universal life insurance covers you until a specific age, which you can set to span your lifetime. The insurer manages the cash value of your policy, offering investment options similar to those for a variable life policy.
The investment comes with a guaranteed minimum interest rate set by the provider. However, the minimum rate is lower than the guaranteed interest in prepaid whole life policies or the expected return on standalone investment accounts. And above that guaranteed minimum, the actual interest rate will fluctuate with the market, unlike SPWL, which accumulates cash value at a fixed rate.
Universal life insurance policies are not generally recommended and the same goes for single-premium universal life insurance. There are better ways to invest and better life insurance products to protect your loved ones.
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A single-premium life insurance policy starts between $5,000-10,000, according to Policygenius quoting data in 2021 for a small death benefit (less than $100,000). Because this one-time payment immediately funds your death benefit and the cash value of your policy, it costs much more than what you would pay over the span of an equivalent term life policy, based on rates from February 2021.
With regular term life insurance, you choose and pay for the death benefit you want, and how much you pay for monthly premiums is based on your health and age. The death benefit of a single-premium life insurance policy is dependent on how much you can spend up front, alongside your age and health.
According to Policygenius data from February 2021, a healthy 28-year-old female living in New York would pay about $17k for a $100k single-premium whole life insurance policy, whereas they would pay about $13.60/month ( $3264 over the life of the policy) for a $100k 20-year term policy. That’s more than five times the cost for the same amount of coverage. Since most people don’t need life insurance that lasts their whole life, the high upfront cost for single-premium life insurance rarely makes sense.
If you withdraw or borrow money from the cash value of your policy as a loan, it will cost you. First, any withdrawals from the cash value may be subject to capital gains taxes. Second, life insurance policies with a cash value component and high yearly premiums are at risk of being categorized as modified endowment contracts. Modified endowment contracts are life insurance policies that have been funded with more money than allowed by federal tax law.
Additionally, any unpaid policy loans can be used as collateral for unpaid premiums, which means your policy could lapse. Unpaid loans at the time of your death can also be subtracted from the death benefit your beneficiaries receive.
It’s best to consult with a financial professional if you plan to borrow or withdraw from your policy.
As with other types of life insurance, the process of getting a single-premium policy begins with a quote and a conversation with an insurance agent or broker. You will be required to fill out an application and go through the underwriting process, which determines your coverage and rates.
You’ll also need to decide what kind of single-premium insurance you want: whole life, variable life, or universal life. Which one you choose depends on how you want to grow the cash value of your policy.
Most people should not get a single-premium policy. But if you have a unique circumstance where you’ll need permanent life insurance, single-premium life insurance might be right for you. Single-premium whole life is the least risky option of the three types of SPLI.
If you can afford a large one-time premium and want to avoid shopping for life insurance in the future, a prepaid policy may be a good option for you. The policy provides an alternative savings option and a tax-free inheritance for your loved ones. This can be particularly important if you have dependents who would benefit from financial support after you die, like a child with disabilities or a health condition who might need specialized care into adulthood.
In an emergency, you can withdraw money from your policy, though you may need to pay taxes on the withdrawal. Some single-premium providers allow you to borrow from your policy tax-free to pay for long-term care. In those cases you would either repay the loan with interest or deplete the death benefit available to your beneficiaries.
For the average person, buying single-premium life insurance is unaffordable. Older applicants and people with chronic illnesses will face even more expensive premiums. A term life policy will likely offer equal or better coverage with more manageable monthly or annual payments.
If you expect you’ll need to tap into the cash value of your life insurance policy, other savings options might be easier to manage. And as an investment option, single-premium policies tend to be more complicated and yield lower rates of return than a standard IRA or 401(k) account.
With a single-premium life insurance policy, you make a one-time payment in exchange for permanent coverage. For other more common life insurance policies, such as traditional whole and term life, you pay premiums monthly or annually in exchange for coverage.
Single-premium life insurance, like other permanent life insurance policies, is not the smartest investment for most people. Single-premium whole life insurance provides a fixed-rate cash value with a minimum rate of return. However, the cash value provides less return on your investment than a standalone investment account (such as a 401(k) or IRA).
There are several caveats to withdrawing money from your policy, including possible taxes on capital gains, restrictions on how much cash value you’ve accumulated before you’re able to borrow, and a possible policy lapse if your cash value is completely depleted.
Amanda Shih is a life insurance editor at Policygenius in New York City. She has a passion for making complex topics relatable and understandable, and has been writing about insurance since 2017 with specialities in life insurance cost and policy types. She's previously written for Jetty and LegalZoom.
Amanda has a B.A. in literature and communication from New York University.
Rebecca Shoenthal is a life insurance editor at Policygenius in New York City, specializing in buying life insurance and the ins and outs of life insurance ownership. She's edited business books by the country’s top academics, politicians, journalists, thought leaders and CEOs, including venture capitalist John Doerr’s Measure What Matters, entrepreneur Scott Belsky's The Messy Middle, NYU Stern professor Scott Galloway's The Four, and technologist John Maeda's How to Speak Machine.
Rebecca has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.
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