The primary feature of life insurance is to influence funds to establish an estate that can provide for surviving loved ones or to leave behind something to an organization like a church or charity. Single Premium Whole Life (SPL) is a kind of life insurance in which a large sum of cash is paid into the insurance policy in exchange for a death benefit that is fully guaranteed to remain paid-up until you die. In this article, we look at a few of the different variations of SPL available, which provide a broad range of funding options and cash out provisions.
With single-premium life insurance policies, the funds invested in the policy build up rapidly because the insurance policy is completely funded by the policyholder. The size of the death benefit will depend on the money invested and the age group and overall health of the insured person. From the insurance company’s viewpoint, a young person is considered to have a longer remaining life span, allowing the cash paid in more time to increase before the death benefit is anticipated to be paid out. And, normally, the greater the amount of cash you originally contribute to your insurance policy, the higher your death benefit will be. For instance, a 60-year-old woman might use a $25,000 single premium to provide a $50,000 tax-free death benefit to her named beneficiaries, whereas a 50-year-old male’s $100,000 single premium might provide a $400,000 death benefit.
As the death benefits of life insurance policies present you with an effective means to provide for your surviving dependents, you also want to consider unforeseen expenses that might crop up as you age. You most likely understand the necessity of long-term care insurance, as long-term care can commonly turn out to be a costly predicament. But imagine you have delayed purchasing this essential coverage because you cannot bring yourself to pay the yearly premiums? SPLs can provide a legitimate solution.
Many SPL policies will provide tax-free accessibility to the death benefit to cover long-term care costs. This function can help in protecting your other assets from the possible frustrating cost of long-term care. The death benefit leftover in the policy once you die will pass tax-free to your named beneficiaries. And if you do not utilize any of it, the funds will go to your surviving loved ones just as you had initially planned. Consequently, your SPL plan enables you to cover your long-term care requirements, but still leaves the greatest possible amount of your death benefit unimpaired for your surviving dependents.
A wide variety of SPL policies also consists of a feature that will let you remove part of the death benefit if you are clinically diagnosed with a critical illness and have a life expectation of 12 months or less. This versatility allows you to put away a significant single-premium payment into an SPL insurance policy, which is crucial to contemplate if you have limited economic assets outside of your SPL.
There are two well-known single-premium policies that offer distinctive investment options.
Single-premium whole life pays a fixed interest rate depending on the insurer’s investment experiences and existing economic circumstances. A mutual insurance company might also pay out dividends to policyholders.
Single-premium variable life enables policyholders to pick from a menu of expertly managed stock, bond and money market sub-accounts, as well as a fixed account.
Your preference should really rely on your capacity to handle market variations, the structure of the various other assets in your portfolio, and the way you plan to utilize the insurance policy’s cash value. With a fixed interest rate, you can rely on the safety and reliability of the continuous growth rate in your insurance policy, but you will likely miss out on possible gains if the financial marketplaces have a very good run. The lowest death benefit is developed when you buy the policy, but if the insurance policy’s account value increases beyond a specific amount, then the death benefit can increase as well.
Alternatively, if you prefer the probability of under performance over the guarantee of a fixed interest rate, a variable life insurance policy with sub-accounts invested in equities and bonds may possibly make more common sense for you.
SPL policies give you complete control over your financial investment, providing access to the cash value for emergency situations, retirement, or other possibilities. One way to withdraw the cash in the policy is by taking a loan.
You can typically consider a loan equivalent to 90% of the policy’s cash surrender value. This will certainly decrease the policy’s cash surrender value and death benefit, but you still have the choice to pay back the policy loan and re-establish the full death benefit.
The insurance companies will also allow you to withdraw money and deduct that withdrawal from the insurance policy’s cash surrender value. The insurers usually have a minimal amount that you can take out. The total you can take out each calendar year without having to pay a surrender fee might be 10% of the premium paid in or 100% of the policy’s gains, which ever is higher.
Nevertheless, an additional cost can develop from withdrawals or loans from your SPL, since SPL insurance policies are typically considered modified endowment contracts (MECs). This means that there is a 10% IRS penalty on all increases withdrawn or borrowed before age 59 1/2. You will additionally have to pay taxes on the profits. Additionally, if you surrender the policy, the insurer will likely hit you with a surrender charge.
Your financial investments will grow tax-deferred within the policy. As mentioned above, you will just pay tax on the earnings if you cash out or borrow money from the insurance policy. Your designated beneficiaries, however, will get the benefits income-tax free with no time delay and cost of probate. This is a critical benefit, as you do not want the efforts made and expense you committed to providing death benefits for your surviving dependents to be muted by unnecessary time delays and probate costs.
The very least amount you can invest in an SPL insurance policy is typically $5,000, which can make it too expensive for some investors. Additions are not allowed. You should only contemplate using resources that you had intended to pass on to the next generation or to help in funding a long-term objective, such as retirement. Furthermore, you will have to satisfy the insurance company’s medical underwriting requirements to qualify for SPL.
If you have a fairly large amount of cash that you do not need presently, and you are looking for guaranteed life insurance coverage for your family or your preferred charity, a single-premium life insurance policy may possibly be the appropriate product for you. It is also an exceptional way to start a child’s life insurance program.
For example, you could select a child or grandchild as the insured person and maintain the policy in your name. This way you would still maintain control over the cash value. Or, you could designate him or her owner as a means to remove the insurance policy from your estate. However you determine to use a single-premium life insurance policy, keep in mind to take into account your personal financial circumstances and other retirement programs already in use so you can choose and design your policy to best meet your needs.