Single Premium Life Insurance Explained

Explain Single Premium Life Insurance (SPLI)

As the name inplies, single premium life insurance (SPLI) is funded with one large payment. This is different than paying monthly premiums like most of us are used to. Since this is whole life, that one lump sum payment will guarantee that the death benefit will be payed upon the insured person’s death. As with any other life policy, the premium will vary by the insured person’s health and age, the insurance company, and the amount of the death benefit.

Advantages of SPLI

Single premium life insurance policies are usually considered for estate transfers, and are usually done when the policy owner is certain they will not need access to the money for a few years (or ever).  If you want to take a sum of money and turn it into a larger inheritance,  it may be a good product for you.

It may also be a good product if you may like to have the option to borrow against it, or even cash it in, at some point a few years in the future. And many policies provide an accelerated death benefit, so part of the death benefit can be used if the insured person has a terminal illness or nursing home confinement under the terms of the policy.

Consider a retiree who comes into a lump sum of money he does not need to live on. With that money he could buy several times the value of cash in the face value of their policy. Let us say for this example that $15,000 could by a $60,000 whole life insurance policy which guarantees lifetime coverage.

He could put that $15,000 into a single premium whole life insurance policy. Then he would know that $60,000 would be passed on with his estate at the time of his death.

The cash value of that policy should also grow very quickly, giving the owner some options. The owner could borrow aganst the cash value, or if their situation changes, they could cash it in for the face value. Note that I mentioned the cash value should grow quickly, but the owner will usually lose some cash value if they have to cash it in too soon. I also noted that an SPLI policy is best considered when the money is not needed in the next few years.

Single Premium Life Insurance Benefits

• One lump sum payment purchases a guaratneed amount of life insurance coverage that will not go down.
• The face value (death benefit) of the policy should be much larger than the paymemt.
• The owner has the potential to build up a cash value very quickly. This money can be borrowed against, but that loan may reduce the death benefit amount.
• SPLI policies may accept older applicants, up to age 80, because of their ability to get funded very quickly.

Tax Considerations of a MEC

The IRS considers a policy that does not require at least 7 years of payments to be a Modified Endowment Policy. That means that you will lose some tax advantages of regular life poicies. Be sure to consider this before you purchase an SPLI policy.

Disadvantages of Single Premium Life Insurance

This type of policy is not for everybody. Before you make a decision, be sure and consult with an insurance professional so you find the best solution for you, and for your family. Here are some potential SPLI disadvantages to consider.

• There could be fees or surrender charges for early withdrawals. Again, these type of policies serve best if the money can be set aside for a few years.
• The IRS does not always treat these policies like normal life insurance. Make sure you understand the tax consequences of future policy transactions.

Learn More

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