Learn all about single premium whole life policies, which can offer excellent end-of-life and death benefits with just one upfront payment.
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Insurance comes with a lot of jargon. Whole life insurance. Rider. Tertiary beneficiary. You get the idea. But if you think those are nutty, wait until we introduce you to Single Premium Life Insurance. It’s basically the supercalifragilisticexpialidocious of the insurance world!
Fortunately, like supercalifragilisticexpialidocious, this type of policy is actually pretty easy to get your head around. Just don’t try to say it backwards!
Single premium life insurance is a type of permanent life insurance that charges the policyholder upfront and then provides lifelong coverage to the policyholder. Instead of making annual or monthly payments, you pay one lump sum upfront.
Essentially, you invest a significant chunk of money into this policy, and then you watch it grow over time. And because the policy is paid for upfront, the death benefit is guaranteed.
There are two types of single premium policies: variable life insurance and whole life insurance. The first allows cash value growth in actively managed portfolios. The second offers risk-free (albeit fixed) growth.
While this all sounds really good (and it is!), there are still some considerations. Withdrawals, for one, can be complicated, and you’ll have to deal with taxes. But the main difference between single premium policies and more conventional coverage is the investment opportunity and amount of money needed initially: The payment required is high (real high!), and many people just don’t have that amount of money available off-hand. But this means that if you do choose to purchase single premium insurance, the investment returns tend to be larger — much larger.
A discussion with an insurance agent or financial advisor can help you determine what makes the most sense for your budget and circumstances. After all, the upfront payment on a single premium life insurance policy might make traditional life insurance more accessible for you. You’ll want to explore all your options.
Everyone! Even if the upfront payment doesn’t make sense right now, it’s still good to know your options in case you want to consider it in the future. Here are some reasons you might want to consider this type of policy:
We hinted at the tax implications involved with this policy type earlier. So here’s the backstory: for a while (a long while), single premium life insurance was used by the wealthy to avoid taxes. Individuals could invest tons of money into these policies and then take out interest-free loans. And, to top it off, there was no tax penalty and no age restriction. Single premium life insurance policies were basically tax shelters under a different guise.
However, thanks to the Technical and Miscellaneous Revenue Act, which Congress passed in 1988, it is now much, much harder to hide your money in policies like this. The Technical and Miscellaneous Revenue Act changed how insurance policies were classified: specifically, they became known in the biz as modified endowment contracts (MECs). Taxable gains come out first, before the principle, thus eliminating many tax benefits.
Nowadays, you can only take out smaller amounts of cash or loans without a penalty if you’re over the age of 59 and a half. So you’ll definitely want to speak with a tax expert to make sure you understand how these policies could affect your taxes before making any moves.
Long-term planning can be stressful. But that’s why there’s Marble. Once you create your account, you can shop for policies and compare quotes, all while earning rewards. Make your life easier and sign up today!
