Updated October 21, 2021|3 min read
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Single-premium life insurance (SPLI), also known as prepaid life insurance, is a type of permanent life insurance. Instead of paying a premium in monthly or annual installments, you make one payment up front. That premium funds the death benefit and a cash value for your lifetime.
Single-premium life insurance isn’t recommended for most people because of its high cost and limited investment growth. But, it can be an option for high-earners who need an alternative way to save.
The first and only premium payment can start at $5,000 for a low coverage amount
Single-premium policies 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
Your single-premium payment guarantees your loved ones a death benefit and fully funds your cash value account for life. The size of the death benefit depends on your payment amount, age at the time of application, and overall health.
The cash value functions similarly to an investment account since it grows tax-deferred at a rate determined by your insurer or the stock market. Fully funding your cash value upfront maximizes your opportunity for gains by giving the most amount of money as much time as possible to grow. You can draw upon the cash value before you die or take out a policy loan, both with some restrictions.
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There are three common types of SPLI, which differ mainly in how insurance providers treat the cash value:
Single-premium whole life: The cash value grows at a rate set by your insurer, similar to a savings account. Insurers often guarantee a minimum interest rate, making this the lowest risk single-premium option for most people.
Single-premium variable life: Like standard variable life insurance, you choose how to invest your cash value. Options are managed by your insurer and include index funds and money market accounts. This type of SPLI has no guaranteed minimum, so it has the highest investment risk, but greater growth potential.
Single-premium universal life: Universal life lets you pick your investments, like variable life, but comes with a guaranteed minimum interest rate, like whole life. Above that minimum, your interest rate changes with the market.
How much the cash value can grow depends on the level of investment risk in your plan. It’s best to max out traditional investment accounts like an IRA or 401(k) before considering SPLI.
“Due to the lower average rate of return within cash value life insurance policies, we usually only recommend these if other money-saving and investing avenues have already been utilized,” says Patrick Hanzel, Advanced Planning Team Lead and Certified Financial Planner at Policygenius.
The minimum upfront premium for single-premium life insurance is $5,000-10,000, according to 2021 Policygenius data. For that price, you’ll get a death benefit of less than $100,000. How much coverage your premium equates to is based on insurance risk factors like your health, age, and gender. That means a younger and healthier person could pay the same single premium amount as an older person, but get a higher death benefit.
In addition to the upfront cost of a single-premium policy, there are tax implications if you access the cash value. Expect withdrawals to come with administrative fees and taxes. The withdrawal is also treated as a loan, so any amount you don’t repay is subtracted from the death benefit your loved ones get.
Single-premium policies are also at risk of being categorized as modified endowment contracts if your initial premium exceeds an amount determined by the federal government’s 7-pay test.  Withdrawals from modified endowment contracts are taxed as income, plus a 10% penalty, before age 59½.
Most people should not get a single-premium policy. You’ll spend much less on term life insurance, which lasts only as long as you need it, and you can get better investment returns elsewhere. If you need lifetime coverage or a cash value account, it’s less complex to manage a permanent policy with monthly or annual premiums.
A single-premium plan can make sense for certain people with a high net worth and unique financial needs. Work with a certified financial planner to explore your options and discuss any tax implications.
Premiums start at $5,000 for small death benefits under $100,000. How much coverage your initial payment buys you depends on your health, age, and other risk factors.
Withdrawals from the cash value may be taxed, and in some cases, you may also face an added 10% penalty for withdrawals before age 59½.
Single-premium life insurance is not a good investment for most people. Interest rates are often lower than in traditional investments and withdrawals come with high fees and administrative costs.