Single Premium Life Insurance

Single premium life insurance is a type of life insurance policy. The policy is funded in a single payment, with no ongoing premiums required. The policy is a permanent life insurance policy, so once paid for, a death benefit will always be paid.

What is a single premium life (SPL) insurance policy?

Single premium life insurance is a type of permanent life insurance policy. It works differently than most whole life insurance or term life plans. It's important to understand life insurance basics to know why an SPL plan is so different.

Most life insurance plans require the policyholder to pay ongoing premiums. These premiums must be paid the whole time the policy is in effect. Single premium life insurance doesn't require this. Consumers buying a SPL policy make one large lump-sum payment. This single payment fully funds the policy. 

Single premium life insurance remains in effect permanently after the lump-sum payment is made. A death benefit will be paid out whenever the policyholder dies. 

The policy also acquires a cash value, so it serves as an investment. That cash value grows over time. There's a policy cash surrender value for consumers who want to cash out their policies. Consumers can also borrow against the cash value. 

Types of single premium life insurance 

There are several different kinds of single premium life insurance. These are the different types of SPL policies that are available. 

Single premium whole life insurance 

Whole life insurance is distinct from term life insurance. Term life insurance is in effect for a set number of years, called the coverage term. The coverage term could, for example, be 20 years or 30 years. If the policyholder doesn't die during the term, no benefit is paid out with a term life policy. Whole life policies, however, don't have an expiration date. The death benefit is always paid. 

Most whole life policies require monthly premiums. But single premium whole life insurance is an alternative. One lump-sum payment is made with single premium whole life coverage. Once the payment is made, the policy is in effect indefinitely. It also acquires a cash value. With SPWL, the cash value grows at a guaranteed rate over time. 

Single premium variable life insurance

Variable universal life insurance is also a type of permanent life insurance, so it remains in effect indefinitely. It is possible to buy variable universal life insurance that requires ongoing premiums. But single premium variable life policies are fully funded with just one lump-sum payment, and are an alternative to coverage that must be paid for on an ongoing basis. 

Single premium variable life policies also accrue a cash value, just as whole life policies do. But the cash value grows at a variable rate. The rate of growth depends on investments selected. Insurers usually offer a choice of several investment options, such as a money market fund or an S&P 500 index fund. 

Single premium variable life insurance policies can sometimes acquire a larger cash value than whole life policies. But there are no guarantees, as returns depend on investment performance. Policies also come with fees, which vary based on what investments are selected. 

Single premium universal life

Single premium universal life policies are another type of whole life coverage. Again, the policy is funded with a lump-sum payment, as opposed to a standard universal life policy which requires ongoing premiums. 

This type of policy offers a guaranteed minimum cash value growth rate. But the actual return on investment and growth of the policy's cash value will depend on investment performance. 

What is a modified endowment contract?

Since single premium life insurance policies require a large premium payment, they are considered to be a type of modified endowment contract (MEC). This affects the tax treatment of the insurance policy. 

Life insurance policies become MECs when premium payments exceed a set limit. The policy is classified as being overfunded. This can trigger tax consequences, including income taxes and a 10% penalty if money is taken out of the policy or if a loan is taken against the policy before age 59 1/2.  

Distributions from the policy may also be treated differently than distributions from most permanent life insurance policies that require ongoing premiums. Withdrawals from MECs occur on a last-in, first-out basis. The result is that distributions come out of interest the policy has paid, and so are subject to income tax at the policyholder's ordinary tax rate. 

Pros and cons of single premium life insurance

Pro: Only one payment is required for life insurance

One big benefit of single premium life insurance is that no ongoing premium payments are required. Once the lump-sum payment is made, there is no need to continue sending money to the insurer. This eliminates the risk that insurance could become unaffordable later. It also means insurance doesn't have to become part of the monthly budget. 

Pro: Policies acquire a cash value

Single premium life insurance policies serve as an investment because they acquire a cash value. The policies offer tax-deferred growth. Since the policy is fully funded from the time it is purchased, it may acquire a cash value more quickly than other kinds of permanent life insurance. 

Pro: Policies come with living benefits

Typically, single premium life insurance policies offer living benefits. Policyholders can borrow against the policies to cover long-term care costs. Or they may provide a lump sum or periodic payments from the death benefit in the event the policyholder is diagnosed with a terminal illness. 

Con: A large sum of money must be paid upfront

The big downside of single premium life insurance policies is that the lump-sum payment could be very expensive. As a result, many people cannot afford to buy single premium life insurance coverage. 

Con: A tax penalty could apply for loans or withdrawals

Because single premium life insurance policies are modified endowment contracts, they do not receive the same favorable tax treatment as other life insurance policies. Penalties and taxes could apply when borrowing against the policy or making withdrawals. 

How is an SPL policy premium calculated?

Insurers consider many factors when setting the cost of single premium life insurance. These factors include the size of the death benefit, the age when coverage is purchased, and the covered person's health status. 

Alternatives to SPL policies 

Standard term or permanent life insurance policies serve as alternatives to single premium life insurance. 

It is possible to buy a term life policy with ongoing premiums for much less money than a SPL policy. While term life coverage requires monthly premiums, they are usually affordable.

Whole life, universal life, and variable life policies that require ongoing premiums are also alternatives to single premium life insurance. These types of policies remain in effect indefinitely and acquire a cash value. But they may have more favorable tax treatment and may be more affordable than single premium policies.