As you can see in the table above, you’re going to save a lot of money if you choose a single-premium life insurance policy. It may be something to consider if you are able to afford the SPL.
Pros and Cons of Single Premium Life Insurance
There are advantages and disadvantages with every type of life insurance policy. Let’s look at the pros and cons of single-premium life insurance.
What we like about Single-Premium Life Insurance
There are many benefits of single premium life insurance
1. Single Premium
This may see obvious considering it’s called single premium life insurance. With a single payment – you’ll never have to worry about another future premium payment. Your death benefit will be guaranteed immediately. What a relief!
2. Accelerated Death Benefit
There are many single-premium life insurance policies that provide an accelerated death benefit. This life insurance rider allows you early access to your death benefit if you’re diagnosed with a terminal illness.
3. Cash Value
Your policy will grow cash value over time. With single premium life insurance – the cash value grows quicker compared to a traditional whole life policy that is paid monthly or annually.
What we don’t like about Single-Premium Life Insurance
There are definite disadvantages to single premium life insurance.
It’s pretty obvious that a single premium life insurance policy comes with a hefty price tag. For most people, an SPL is simply unaffordable. However, if you can afford an SPL, it provides great savings over the life of your policy.
If you decide to apply for a single-premium life insurance policy, you’re going to have to take a medical exam. SPL policies are fully underwritten life insurance policies. This means you’ll have to schedule and complete a medical exam that the company pays for. It’s similar to an annual physical where you provide a urine sample and blood test. If you don’t hate needles, this isn’t that big of a deal.
3. Potential Taxes and Losses
Permanent life insurance policies sometimes come with an investment risk. The money that grows in your policy is not taxed. However, the profits can be when you withdraw money before you pass away.
One of the biggest things we hate about single premium life insurance policies is that they’re considered a MEC. A modified endowment contract has some downsides like taxes for policy loans or withdrawals. If you’re thinking of an SPL for short term cash value growth, you may want to consider another policy. Let’s dive a little deeper into the MEC.
What is a modified endowment contract?
A modified endowment contract is a type of life insurance tax qualification. It’s when a policy has been funded more cash that the federal tax laws allow. When a life insurance policy has become a MEC — it is no longer viewed as life insurance by the IRS. The IRS then considers it a modified endowment contract. Once your life insurance policy is viewed as a modified endowment contract, it can no longer be reclassified as a traditional life insurance contract.
You’re probably wondering why did the federal government did this? Simple put, they did this to eliminate people using life insurance policies as a tax shelter. A single premium whole life insurance policy is considered a MEC if it began after 6/20/1988. It’s considered a MEC because it exceeds the IRS “7 Pay Test” limit. In other words, it exceeds the limit for the total amount of money the policyholder can put in their life insurance policy.
Single-Premium Life Insurance Questions
Still wondering if a single premium life insurance policy is right for you? Choosing the right policy can be a bit confusing and stressful. Don’t worry – at Life Insurance Blog we’re ready to help.
Our independent life insurance agents aren’t trying to meet sales quotas or push you towards any particular company. We have relationships with the best life insurance companies in order to find the right one for you. In fact, we have access to over 60 carriers. We have no doubt that we’ll find the best life insurance company for you.
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