Single-premium whole life policy – is it a good investment?
SPL policies represent what many consider as an extreme type of whole life, limited-payment life insurance.
How does a single premium whole life policy work?
The common features of SPLs include:
Only a single premium payment is made. No other payments done in the future.
The policy is paid up in full.
The rates are low because interest rate assumptions are higher.
When the single premium payment is made it creates cash value which immediately becomes available to serve as collateral to a loan.
Cash value accumulates every year even though there are no additional payments.
Dividends are given out yearly starting on the end of the policy’s second year.
What are the pros and cons of a single-premium whole life policy?
Advantages of single premium whole life insurance:
Death benefit can be passed on tax-free. This is the biggest benefit afforded by SPLs. In addition, this benefit will go to an individual’s heirs without having to go through probate which is a huge advantage to those with larger estates.
No worries that the policy will lapse. Because a single premium payment is made, there is no need to worry about late payments.
Offers faster access to policy amount. This could be crucial in case the policy owner needs money to cover, for instance, long term care costs.
Allows access to a portion of the death benefit. This may be possible if the policy holder is suffering from terminal illness.
Constant and stable growth. This is because of the fixed interest rate attached to the policy.
Money in the policy is tax-free. Which is possible when it is not withdrawn from the policy.
Disadvantages of single premium whole life insurance:
The cost can be prohibitive to many people. The minimum amount pegged for SPLs is $5,000. Usually, this is not enough coverage for many consumers.
You are required to pass strict medical qualification for life insurance. If you plan to increase the amount for death benefit, you will have to undergo another round of underwriting.
Fixed rate on returns. The fixed rate of interest may provide protection in times of unstable market conditions. However, it will also prevent the policyholder from maximizing his benefits when the market is on an upswing.
IRS penalties. This applies when the cash value is withdrawn or is taken out as a loan. When withdrawals are made or a policy loan is taken out prior to the age of 60, an IRS penalty of 10 percent is applied.
Surrender charges apply. This happens when the policy is cashed in.
Taxation on Single Premium Whole Life
Beneficiaries will get the proceeds tax-free. However, if the cash value is withdrawn or a loan is made against the policy, the earnings portion of the policy amount will be subject to tax.
Is single premium whole life a good idea?
The following are situations where a single premium whole life insurance may be a good option:
When the individual is below 55 years old and has a 30-year working horizon. The time frame allows the SPL enough time to let the cash-value grow.
When buying for children. This is because of the cost savings as premium rates are low.
For seniors 50 years old and above who are looking to maximize available benefits when transferring their wealth. The SPL will allow them to set aside a large amount of money for their heirs.
For people who have heirs who will need a lifetime of income as in the case of special-needs grandchildren.