Single Premium Whole Life Insurance
- Discover what single premium whole life insurance is and how it works, including the main types of single premium whole life insurance and how they differ.
If you want to ensure a significant death benefit for your beneficiaries or plan for your own long-term care in later life, single premium whole life insurance may be worth considering. Below, you can find out what single premium whole life insurance is and how it works.
What Is Single Premium Whole Life Insurance?
Single premium whole life insurance is a type of life insurance funded through a single installment. At the start of the policy, the insured person pays a lump sum to the insurance company. The money is then invested and accumulates cash value to provide a tax-free death benefit to the named beneficiary when the insured passes away. This type of life insurance often appeals to people who want to fully fund their life insurance policy in one go without the need to make regular premium payments.
How much the death benefit is worth at the point of payout depends on how much you paid in as a lump-sum premium and how long you live after setting the plan up. The longer your life expectancy, the longer your capital has to accumulate cash value. Therefore, a larger premium invested by a younger person in good health will yield a higher death benefit than a smaller premium invested for a shorter time.
Types of Single Premium Whole Life Insurance
There are two types of single premium whole life insurance: whole life and variable life. A whole life policy grows cash value at a fixed interest rate set by the insurance company while a variable life policy lets you allocate funds across various investment options alongside a fixed rate savings account.
Whether you should choose whole life or variable life insurance depends on your investing knowledge and appetite for financial risk. A fixed-rate whole life policy is the less risky option because most policies have a minimum death benefit, so you can ensure that your beneficiaries will receive at least this amount. Furthermore, a fixed interest rate means that you can accurately predict what your policy will be worth.
However, a variable life insurance policy has higher growth potential because you could earn more on your investment if the market performs well. On the other hand, the value of your policy could end up going down as well. Therefore, this type of policy is only a suitable option if you're prepared to risk your death benefit value decreasing and you have the investing knowledge to allocate your funds and monitor their performance.
Single Premium Whole Life Insurance Advantages
The primary advantage of a single premium whole life insurance policy is that your policy is fully funded from the start, providing the maximum time possible for your investment to accumulate cash value. Therefore, the death benefit received by your beneficiaries could be significantly higher than it would be if you invested the same sum over several years.
Furthermore, single premium whole life insurance lets you fund your policy in one go and then leave it to grow without worrying about contributing further funds. Therefore, it could be a good option if you have capital available that you don't need for essential expenses.
Single Premium Whole Life Insurance Disadvantages
Single premium whole life insurance usually requires a premium payment of at least $5,000, and this amount won't provide adequate coverage for many people. Therefore, the costs of paying a large enough single premium are likely to be prohibitive.
You shouldn't invest large sums of money in a single premium whole life insurance policy unless you're sure you can afford it because it could be difficult (and expensive) to access the money if you decide you need it later. If you don't have a large lump sum to spare and earn a regular salary, you may be better off with a life insurance policy that charges regular, smaller premiums.
Is Single Premium Whole Life Insurance Tax Deductible?
When you invest money in a single premium whole life insurance policy, the money is invested and accumulates cash value on a tax-deferred basis. Your beneficiaries won't pay tax on the death benefit when it's paid out after you die. However, you will usually have to pay tax on withdrawals made during your lifetime because any gains made on your investment are subject to income tax.
Can I Withdraw From a Single Premium Whole Life Insurance Policy During My Lifetime?
You can usually withdraw money from your single premium whole life insurance policy, but it can be expensive. Most companies set a mandatory minimum amount for withdrawals, and you'll have to pay income tax on any gains. Your policy will likely be considered a Modified Endowment Contract, which means that you'll have to pay an extra 10% income tax on any profits you withdraw or borrow before your 59th birthday.
You may also be able to take out a loan against the value of your policy, which may also be subject to additional taxation as an MED. Withdrawing from or taking a loan against your policy will reduce the death benefit, but you can restore the death benefit by paying the loan back.
However, you may be able to withdraw money from your policy without paying income tax in certain circumstances. Many single premium whole life insurance policies let you withdraw funds tax-free if you need it to fund your own long-term care or are diagnosed with a terminal illness. Therefore, some people use a single premium whole life insurance policy as an alternative to long-term care insurance, and your beneficiaries will receive any money left over as a death benefit. If you don't need long-term care, your beneficiaries will receive the full death benefit as planned.
What Is the Difference Between Single Premium and Regular Premium?
Unlike single premium whole life insurance, a life insurance policy with regular premiums charges smaller premiums monthly, quarterly, biannually, or annually. Regular premium policies are more common because most people don't have access to a large lump sum and prefer to contribute small, frequent amounts from their salaries. Often, a policy charges level premiums that stay the same for a set period so that the insured knows precisely how much must be paid and when.
Another key difference between single premium whole life insurance and certain regular premium policies is whether they accumulate cash value. Whole life and variable policies with regular premium schedules generally accumulate cash value from investments. However, they won't usually grow as quickly as a single premium account because the money is invested over time.
Term life insurance policies don't accumulate cash value like single premium whole life insurance. Instead, they pay a set death benefit if the insured dies while the policy is in effect, and coverage ends if they outlive the policy term.