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When you buy life insurance, you usually make recurring premium payments either for the term of the policy or your lifetime, depending on the type of coverage you have. With single premium life insurance, you pay just once when you purchase the policy. But this type of insurance isn't financially accessible for everyone, and it may not be necessary if your main reason for getting coverage is to replace your income after your death.
Read on to learn more about single premium life insurance, how it works and whether it might be right for you.
What Is Single Premium Life Insurance?
Single premium life insurance is permanent life insurance that requires policyholders to make just one payment to maintain coverage for life. Like other types of permanent life insurance, it provides a death benefit and cash value account, but it doesn't require recurring premium payments to keep the policy active. Because you only make one payment in exchange for lifetime coverage, the upfront cost of single premium life insurance is significantly higher than other types of life insurance.
How Does Single Premium Life Insurance Work?
With the exception of the large upfront payment, single premium life insurance works similarly to other types of permanent life insurance. Here's how.
Premium
When you purchase single premium life insurance, you make one payment to receive coverage for life. Since you don't make recurring payments, you don't need to include life insurance premiums in future budgets.
Death Benefit
Your beneficiaries are guaranteed to receive a payout after your death. The amount they receive depends on the amount of coverage you choose when you purchase a policy.
Cash Value
Typically, when you buy permanent life insurance, part of each premium payment goes toward the policy's death benefit and part is deposited into a cash account. Since you make multiple payments over your lifetime, the cash value accumulates slowly. However, with single premium life insurance, the policy's cash value is fully funded right away. The money in the account grows tax-deferred, and you can use it for any reason, such as paying for health care, your child's education or emergency expenses. However, withdrawals may be subject to special tax rules (more on this below).
Types of Single Premium Life Insurance
There are three main types of single premium life insurance to choose from. All three require one upfront payment and provide lifetime coverage, but they work a little differently. Here's a breakdown of each.
- Whole: The interest rate on the cash value of single premium whole life insurance is guaranteed, so you always know how much you'll earn. Some insurance companies also pay out dividends on whole life insurance policies.
- Universal: The interest rate on the cash account of a universal single premium life insurance policy isn't fixed, making it less predictable than whole life insurance. Some companies set a minimum rate for the account, providing some protection to policyholders.
- Variable universal: This type of coverage allows you to choose how you want to invest the funds in your cash account, offering the potential for higher returns and the risk of greater losses. Variable universal policies don't offer guaranteed returns or a minimum rate, so your cash account could lose value over time.
Pros and Cons of Single Premium Life Insurance
Pros
- Convenience: Since you make only one upfront payment, you don't have to budget for recurring premium payments over your lifetime.
- Lifetime protection: Like other types of permanent insurance, single premium life insurance offers lifetime protection to the policyholder.
- Cash value: You can tap into the policy's cash value account during your lifetime and use the money for any reason.
- Tax-deferred growth: Earnings on the policy's cash account grow tax-deferred.
Cons
- Affordability: The large upfront payment required to purchase single premium life insurance may not be practical for many people.
- Can't make changes: Some permanent life insurance policies allow you to change the death benefit and increase or decrease your premium over the life of the policy. You can't do that with single premium life insurance.
- Taxes: Because policyholders pay for single premium life insurance upfront, it's typically considered a modified endowment contract (MEC) by the IRS. The tax rules that apply to MECs may affect your withdrawals from the policy. For example, when you withdraw money from the cash value, you may have to pay income taxes on it, and if you make a withdrawal before age 59½, you'll likely be subject to a 10% penalty.
How Much Does Single Premium Life Insurance Cost?
The average cost of a single premium life insurance policy with a $100,000 death benefit is $22,000, and the average price of a policy with a $1 million death benefit is $152,000, according to QuickQuote, an online life insurance brokerage.
Policy pricing varies based on multiple factors, including the amount of coverage you choose, your age, health status, lifestyle habits and more. Generally, policies with larger death benefits cost more than policies with lower payouts, and people in good health pay less for coverage than those with health challenges.
Is Single Premium Life Insurance Worth it?
Single premium life insurance may be worth it for people who've already accumulated significant assets and are looking for a conservative investment option for excess cash. It may also be a good choice for someone who wants to fund a trust for their beneficiaries, leave money behind for their loved ones or cover estate taxes without tapping into other investments.
However, the large outlay of cash required to purchase a single premium life insurance policy makes it impractical and unnecessary for most people. If you're looking to provide a financial nest egg for your dependents after your death, term life insurance is probably a better bet. You can typically get more coverage at a much lower price point. Additionally, the investment potential on the cash value account of a single premium life insurance policy is generally low compared to other types of investments. If your goal is to maximize your investments, you may be able to earn more elsewhere.
How to Buy Single Premium Life Insurance
If you're interested in purchasing a single premium life insurance policy, you can complete the process in a few simple steps.
- Research providers. Different insurance companies have different products, rates and features. Gathering information about multiple insurers will help you find the one that best fits your needs.
- Compare quotes. Because insurers have different rating criteria, pricing can vary significantly between insurers. Getting multiple quotes will help you find the best rates.
- Complete an application. Getting a quote will give you an estimate of what you can expect to pay, but the only way to know if you qualify for coverage and what the price of a policy will be is to complete an application. You must provide information about your medical history, lifestyle habits, age, weight, gender, occupation and more.
- Receive an application decision. After reviewing your application, the insurance company will let you know whether you're approved. If you want to purchase the policy, you must pay before your coverage is effective.
How Do I Know if Single Premium Life Insurance Is Right for Me?
For most people, another type of life insurance may be a better bet—especially if your purpose for purchasing coverage is income replacement. However, there may be situations where getting single premium life insurance makes sense. If you have the cash to cover the premium and want to use the death benefit to fund a trust or pay for estate taxes, it may be worth considering.
The only way to know whether single premium life insurance is right for you is to evaluate your reason for buying coverage, your individual financial situation and other options you might consider. Because the cost and potential tax implications can be significant, it's a good idea to talk with a financial professional who can evaluate your overall financial picture and review your options with you before deciding whether to buy this type of coverage.