Within permanent life insurance, there is a little-known but interesting category: single premium life insurance. This policy is based on a single payment that pays the insurance off forever, regardless of how long the insured lives. It is a very attractive option for anyone who has the money to invest in a reliable policy that will offer certain benefits and advantages in the long term.
If you are thinking of purchasing life insurance, keep the single premium option in mind. In this article, we will explain what it is, how it works, and when it could be right for you.
Single Premium Life Insurance: Table of Contents
Single Premium Life Insurance: What Is It?
When choosing life insurance, there are many options and factors to keep in mind. An important one is the price of premiums. With permanent life insurance, the type that lasts throughout the lifetime of the insured, premiums are generally paid throughout the entire term length of the policy. This means that every month (or quarter, or every six months, as per the contract) the insured must make a disbursement to continue paying the insurance.
This routine can become a burden: at any given time, the insured may be short on cash, or prefer to use the money for something else, which makes regular insurance payments a bit limiting. In order to avoid the drudgery of constant payments, there is a different type of insurance available: single premium life insurance. It is a form of insurance that can be paid off in one payment. The applicant pays a single premium that is equal to the quantity that the insurer considers necessary to cover the risk of the insured and generate the appropriate payout over the long term.
The payment is made when the insurance is purchased and requires you to choose the type of permanent insurance you are going to buy beforehand. It can be whole, universal, or variable life insurance. Each of these categories can be adapted to a single initial payment, so you must know how each one works.
Whatever kind you choose, you will no longer have to pay premiums on a monthly (or any other) basis, starting from the moment you pay the single premium. In this sense, it is quite different from limited pay life insurance, which stipulates a premium payment for a specific number of years.
In this case, the insurance is paid off from the get-go, and all that's left to do is monitor cash value, beneficiary arrangements, and the balance of the death benefit.
How Single Premium Life Insurance Works
As you have seen, the biggest difference between this type of insurance and other types is that you can pay the entire cost of the policy all at once with an initial and final premium. In order to do this, of course, you need to have a significant sum of money available. To give you a sense of this sum, if you are 40 years old, you can pay a single premium of approximately $75,000 to obtain a policy that pays up to $500,000 to your beneficiaries when you die. But the more you contribute to the initial premium, the larger the payout will be.
Of course, you must have this money on hand, which is not realistic for everyone. But if you have it and you are thinking about buying insurance, it could be the best way to obtain good coverage while saving money that you can utilize in the future in the form of cash value.
Remember that, as always in the case of insurance, the younger you are when you take out the policy, the less risk assumed by the insurance company, and thus the cheaper the insurance and the better the coverage.
Once you fully understand these principles, you should familiarize yourself with other features of single premium life insurance, which change relative to the category you choose. Keeping in mind that it will always be permanent life insurance and not term life insurance, the different forms available are the following:
- Whole life insurance. If your insurance is a whole life policy, the most common form, the insurance company will place your money where it can generate fixed interest in a savings product. This is considered to be the most secure and stable option. It generates benefits more slowly, but more reliably. ul>
- Variable life insurance. In the event that you underwrite a variable life insurance policy, you can decide what products you would like to invest your policy money in, generally equity. These investment strategies generate greater benefits, but are also riskier and may incur losses. It is a more challenging alternative because it requires more of your attention as well as an understanding of the possible investment options. ul>
- Universal life insurance. Universal life insurance allows you to adjust costs so you can opt for lower single premiums. In exchange, the cash value of the insurance may be noticeably lower.
If you are already clear on which of these options fits best with your needs, all other aspects of this insurance are conventional and well-known. Basically, it must go through the same stages as all other policies: quoting, underwriting, and term of the insurance.
The stage of underwriting of life insurance is always the most delicate, because the insurance company decides if you are eligible to enjoy coverage or not. In this life insurance qualification process, you should provide information on your age, habits, health status, financial status, and other insurance coverage.
If you get pass this stage, where you must respond honestly and transparently, all that is left to do is sign the policy, which tends to include some clauses that modify its basic functioning. It will also include the amount of the payout, or death benefit, and the names of those chosen to receive this money. Remember that you can choose the beneficiaries of your insurance and modify them whenever you want. In addition, you can determine different levels of beneficiaries: primary, secondary, and even tertiary in relation to their order of access to the payout. A beneficiary can also be a trust fund that will manage your money according to your directions.
The single premium is paid at the time of signature, and the insurance is now in function until the payout is made upon the death of the insured.
Why You Might be Interested in Limited Pay Life Insurance and its Advantages
Considering this rationale, single premium, or single payment, life insurance has certain notable advantages:
- No premiums to pay. The first advantage is obvious: by making a single payment, you can forget about the routine of periodic premium payments. In addition, even though the single premium is a very heavy expenditure, if you look at it in the context of several decades, which is how long life insurance tends to be in effect, it will definitely amount to less money: keep in mind that today’s dollars will be relatively cheaper after 20 or 30 years have gone by.
- Guaranteed death benefit. Payout is always guaranteed and beneficiaries will collect no matter what happens. In addition, since the insurance is already paid for, there is no risk of it expiring due to a failure to pay the premiums. This way, the death benefit goes to the beneficiaries, tax-free in any situation.
- Rapidly accumulating cash value. A normal policy allocates part of what you pay in premiums to your accumulated cash value. The future payout is generated using the money that the insurance generates through a savings instrument. But when the accumulated amount passes a certain limit, it is given to the insured in the form of cash value. Therefore, it is extra income, and is also tax-deferrable. Conventional insurance takes a long time to accumulate this money, but in single premium insurance, where you pay all of the money at once, the savings and benefit come much earlier.
- Take out loans. Remember that you can take out loans with very good terms against your cash value. You can request up to 90% of your cash value. If you do not return it on time, it is paid off with part of the final payout. Therefore, single premium insurance is a savings strategy: the money will be used to create the cash value that ends up being extra income for the insured.
- Long-term care insurance. Some single premium life insurance policies include a very interesting clause: in the event that you need to finance prolonged medical care, or long-term care, you can access part of your insurance payout to pay for it. Either way, there will always be a part left over for your beneficiaries.
- Accelerated death clause. As with other insurance, this category also allows you to collect the payout if you are suffering from a terminal illness and you have less than 12 months left to live.
Based on these advantages, you should understand that single premium life insurance is a very attractive option for setting aside money to have available and looking forward to a stable, comfortable future. Remember that, in general, the minimum single premium payment is $5,000, so you need a significant sum of money to purchase this policy.
Therefore, think about allocating an amount that you would like to leave as a legacy for your successors for this type of insurance, or perhaps one that will secure your retirement from the get-go. It is also a good idea to give as a gift to a loved one, such as a child. By taking out this kind of insurance, your child will have savings available to him or her that can be used to pay for education, set up a first business, or any other need, as well as a sum that provides support in old age and leaves his or her successors with a good payout in the long term.
In conclusion, you are looking at an insurance category that is more than just another policy option and must be considered very carefully. Consult an insurance agent for more details, especially regarding the taxation of this policy type. Once you have all of the information at your disposal, you will be able to make the best decision.
