Single premium life insurance

Single premium life insurance is a type of permanent insurance policy that provides guaranteed lifetime coverage and cash value growth. But unlike most life insurance policies, which involve ongoing monthly, quarterly, or yearly premium payments, the entire policy is funded up-front with one lump-sum payment.

What is single premium life insurance?

Single premium life insurance is similar to conventional life insurance, but there is one major difference: Instead of ongoing premiums paid monthly, quarterly, or annually, the entire policy is funded with one large up-front payment. This simplifies the policy in some ways, since you don’t have to worry about future premiums, but it can complicate the policy in other ways. Whether a single premium policy or a more traditional policy is right for you will depend on the needs and current finances of you and your family. Later in this article, we will cover the various types of single premium life insurance, as well as the potential concerns around them. First, let’s go over some of the benefits.

Guaranteed lifetime coverage

Single premium life insurance generally offers guaranteed coverage for the entirety of the policyholder's life, and there is only one payment. No matter how long you live, your beneficiaries will receive a death benefit when you pass away. This can be particularly appealing if you want to ensure financial security for your family without worrying about budgeting for ongoing premium payments.

Cash value growth

Like most permanent policies, single premium life insurance has a cash value component that grows over time. When you make that one payment, a portion of it will go into the cash value account. This cash value grows over time on a tax-deferred basis, and can be accessed during your lifetime through loans or withdrawals, which can serve as an emergency fund, a source of supplemental income during retirement, or a way to finance major expenses, such as education or a home purchase. Learn more about the cash value of a life insurance policy.

Single lump-sum premium payment

Unlike traditional life insurance policies that require ongoing monthly, quarterly, or annual premium payments, single premium life insurance is funded with a one-time payment when the policy is purchased. You never have to pay another premium after that. While the initial payment can be substantial, no further financial commitment is needed to maintain the policy, which eliminates the need to remember when premiums are due and eliminates worries that payments might be missed.

Types of single premium life insurance

There are several types of permanent or long-term life insurance policies that can be funded with a single premium, each with unique characteristics and benefits. Funding the policy with a one-time payment simplifies how the policy works, so the difference usually comes down to how the cash value component grows over time. Let's explore the most common options:

Single premium whole life

Whole life insurance is often viewed as the traditional and straightforward option. It offers a guaranteed death benefit and cash value that typically grows at a guaranteed¹ rate, giving you a predictable return on your investment. This stability makes it a popular choice if you’re looking for a conservative and reliable investment.

Single premium universal life

Universal life insurance works similarly to whole life. However, with a universal life policy, an interest rate is set by the provider, and it may fluctuate depending on different factors. Some insurers offer guarantees that the interest rate won’t go below a preset minimum or that you won’t lose cash value.

Single premium variable life

Variable life insurance takes a different approach to cash value growth by offering investment options within the policy. Owners can allocate their cash value among various investment choices, such as mutual funds, exchange-traded funds, or bonds. While this flexibility can lead to potentially higher returns, it also comes with increased risk. The cash value in a single premium variable life insurance policy can fluctuate based on the performance of the chosen investments, which means there is the possibility of losses.

What is a modified endowment contract?

The IRS has specified a limit on the cash value in certain types of permanent life insurance policies. When a policy exceeds these limits, the IRS can label it a modified endowment contract (MEC), and it can lose some of its tax advantages. To be classified as a modified endowment contract, a life insurance policy must:

• Have been created on or after June 20, 1988.
• Meet the definition of a life insurance policy.
• Fail to meet the “seven-pay test” put into law in the Technical and Miscellaneous Revenue Act of 1988 (TAMRA).

The key here is the seven-pay test. It sets a maximum amount of premiums you can pay in the first seven years compared with the total amount. Since single premium policies are paid in full up-front, they are highly likely to be classified as MECs. Once that happens, they are subject to certain tax rules. For example, you might be subject to an early withdrawal penalty if you access the cash value before age 59½ (much as you would with an IRA). Consult a financial or tax professional to understand how a single premium life insurance policy and modified endowment contract might affect your taxes.

Pros and cons of single premium life insurance

Like any large financial decision, you must weigh how purchasing a single premium life insurance policy will impact your current and future financial outlook. In addition to what we’ve already covered, here is a list of the main pros and cons of a single premium policy:

The potential disadvantages of a single premium policy:

• High initial cost
• Modified endowment contract tax implications

The benefits of a single premium policy:

• Lifelong coverage
• Cash value growth
• No future premium payments

Is single premium life insurance right for you?

While life insurance in general plays an important role in anyone’s financial security, single premium policies aren’t right for everyone. But there are some instances in which single premium life insurance makes sense. It can help with estate planning or setting up lifetime income for a dependent with special needs. The up-front payment is large, however, and in many cases a traditional policy is a better fit. The best way to decide what is right for you is to talk over your options with a financial professional with experience in life insurance. He or she can answer your questions and help you make an informed decision. 

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¹Guarantees of a single premium policy are based on the claims-paying ability of the issuer.