Single Premium Life Insurance: A Comprehensive Guide to Lump Sum Policies and Their Benefits

In the world of life insurance, most policies, whether permanent life insurance such as whole life or universal life, or temporary life insurance such as term life, are paid for via monthly premium payments.

But Single Premium Life Insurance reflects a different approach to paying for life insurance. Rather than monthly premiums, a single premium life insurance policy allows you to pay one lump sum payment to fund the policy and secure a tax free death benefit, with no payments at all thereafter.

These single premium life insurance policies offer the peace of mind of knowing that your life insurance plan is fully funded from the get-go, alleviating any worries that a failure to pay premiums could cause your policy to lapse.

Because single premium life insurance policies require a single up-front payment to fund, they are not a good option for those who don’t have the available cash – typically a minimum of $10,000 or more.

Single premium life insurance policies do offer tax-deferred growth in the policy’s cash value account and provide a tax-free death benefit. Unfortunately the tax treatment of such policies is not as favorable as that of cash value life insurance policies that meet the requirements of the IRS seven pay rule.

Single Premium Life Insurance Types

The following are the different types of coverage available for single premium life insurance, along with each types of coverage’s risk profile.

• Single premium whole life insurance policy: Provides guaranteed cash value growth based on interest and non-guaranteed dividends. Low Risk.
• Single premium universal life insurance policy: guaranteed universal life provides different choices for coverage, up to certain ages, such as age 95, 100, 105, 110, and 120. The longer out the coverage is for, the higher the initial premium payment required. Low Risk.
• Single premium indexed universal life insurance policy: cash value growth is tied to an underlying index, such as the S&P 500, subject to cap and participation rates. IUL policies also include a floor of 0-1% to protect your policy from loss. A fixed account is also available. Moderate Risk.
• Single premium variable universal life insurance policy: cash value growth tied to investment in sub accounts, similar to mutual funds, as well as a fixed account. Unlimited upside potential but with variable universal life there is no floor making your principal vulnerable to loss. High Risk.

Single Premium Lump Sum vs Lump Sum High Cash Value Whole Life Insurance

The following webinar covers single premium vs lump sum whole life insurance. In the webinar, two different policies are illustrated, showing the viewer how a lump sum policy can offer similar (and often superior) results to a single premium life insurance policy.

Single Premium Life Insurance Rates

The following single premium life insurance rates are for informational purposes only and must be qualified for. Rates are from A rated carriers and above for a preferred plus male at the age shown. The dollar figure above represents how much one-time payment is required to qualify for the corresponding initial death benefit.

Age	$15,000	$25,000	$50,000	$100,000
40	$43,577	$72,921	$155,927	$312,324
45	$37,790	$62,238	$135,223	$270,853
50	$32,920	$55,089	$117,796	$235,976
55	$28,780	$48,161	$102,983	$206,276
60	$25,369	$42,453	$85,163	$181,830
65	$21,484	$37,776	$75,781	$161,797
70	$18,411	$33,996	$68,197	$145,607

Single premium policies typically use a whole life chassis. A properly structured single pay whole life insurance policy provides guaranteed growth of the cash value account and death benefit. Since the sample rates above are whole life insurance quotes, the death benefit will increase over time.

Modified Endowment Contract Taxation

A life insurance contract which fails to pass a TAMRA 7-pay test is classified as a modified endowment contract due to cash contributions to the policy that exceed IRS limits. A major difference between MEC and non-MEC policies under IRC 7702 is the tax treatment of policy loans and withdrawals.

Policies classified as modified endowment contracts are subject to last in first out (LIFO) taxation from the IRS, meaning that taxes must typically be paid on any withdrawals from a cash account that has grown in value.

In addition, if you withdraw funds from a MEC policy prior to the attaining age 59 ½, penalties for early withdrawal apply, similar to the penalties you would pay for early 401k withdrawals.

As with 401k accounts, in certain cases you can withdraw funds from a modified endowment contract before age 59 ½ without penalty, for instance in the case of a 72T provision.

Traditional participating whole life insurance policies, on the other hand, allow for partial withdrawals tax and penalty-free up to the amount of your contributions to the policy, also known as your “basis” in the policy.

Single Premium vs Whole Life Insurance Similarities & Differences

Aside from tax treatment, MECs and traditional whole life insurance policies share many features.

Similarities Between Single Premium Life Insurance and Whole Life include:

• A death benefit that is paid, typically free of taxes, to your beneficiary or beneficiaries
• Guaranteed growth of the cash value account
• If the policy if offered by a mutual life insurance company you can earn dividends
• Funds in the cash account grow tax-deferred
• Funds can be withdrawn via policy loans or partial withdrawals

Differences Between Single Pay vs Whole Life

• Single Pay contracts are LIFO; Whole Life contracts are FIFO
• Single Pay contracts withdrawals may incur a 10% penalty; Whole life contracts have no such penalties

Why Choose Single Premium Life Insurance?

Given the disadvantages of a MEC as compared to a non-MEC policy from a tax standpoint, why would you want to buy a single premium life insurance policy?

Peace of Mind

One major reason, as previously mentioned, is the convenience and peace of mind created by owning a fully funded life insurance policy, which eliminates any fear of your policy lapsing at some point due to failure to pay premiums.

Savings Vehicle

Another advantage of a single premium life insurance policy is the ability of these policies to act as an alternate savings vehicle offering returns that are competitive to other tax-favored investments.

A single premium life insurance policy, in effect, functions like an annuity contract that includes life insurance protection. As with a single premium immediate annuity, the most effective approach from a tax perspective is to avoid taking loans or withdrawals from such a policy until you reach age 59 ½. The same applies to any policy dividends, which may be taxable if taken in cash.

Potential Higher Returns

While traditional whole life policies also features cash value account growth, a single premium whole life insurance policy may provide better performance in terms of internal rate of return as compared to a standard policy with the same level of insurance coverage. These policies typically can turn in a positive rate of return at least by the time the surrender charge has evaporated, if not sooner.

Tax Deferral

Single premium life insurance policies are often purchased by those who are seeking a policy that enables them to defer taxation and who don’t plan to take withdrawals from the policy, using it primarily for the tax free death benefit. If you plan to pass a significant sum on to your heirs or a charity, a modified endowment contract can be an efficient means of doing so.

Emergency Fund

Another reason for purchasing single premium life insurance is to gain the security of paid-up life insurance with cash value you can access in a pinch. Even if you have done a good job of setting aside money for retirement already, a single premium policy’s cash value can provide emergency funds if they are needed, albeit with potential tax consequences and penalties for early withdrawal.

Living Benefits

Additionally, the availability in recent years of single premium life insurance policies with accelerated death benefit riders that contain long-term care benefits has made these policies attractive as a long-term care (LTC) option in place of long-term care insurance.

Such long-term care riders, which are subject to underwriting approval and may be unavailable in some states, usually enable you access to part of the death benefit upon the occurrence of certain events.

Living Benefit Riders may include:

• Chronic illnesses which leave the insured unable to perform 2 or more activities of daily living, therefore requiring continuous care.
• Accelerated death benefit allow you to access the death benefit tax free upon diagnosis of terminal illness
• Specified medical conditions like cancer or potentially fatal cardiac disease

The ability to use a single premium life insurance as a combination life insurance policy/LTC rider solution with accelerated death benefits as well makes such policies truly flexible financial planning tools.

If you don’t require access to the LTC or accelerated death benefits such policies can offer, you can experience significant growth in your cash value account over time.

Whole life policies, especially dividend-paying policies offered by mutual life insurance companies have typically performed quite well when compared against bank savings accounts and CDs in recent years in terms of internal rate of return.

And if you experience medical emergencies or require long-term care, you can use a portion of the policy’s death benefit to deal with these conditions.

Furthermore, if you need access to your funds for any other reason, you can do so via a policy loan or partial withdrawal, as long as you are aware of the potential consequences in terms of taxes and penalties.

Financial Aid

Another advantage of a single premium life insurance policy is that it can help a child qualify for financial aid. Money held in an insurance policy, unlike funds contained in a 529 account, is not counted as part of the parents’ available assets when it comes to computing a child’s eligibility for financial aid.

Single Premium Life Insurance Alternatives

If the various advantages of a single pay life insurance cited above don’t overcome its disadvantages, there are several ways to avoid owning a MEC without being required to make regular premium payments.

7-Pay Whole Life Insurance Policy

You can choose a 7-pay whole life insurance policy with an initial lump sum payment. A properly structured whole life insurance policy built for maximum cash value growth can be designed so that your initial premium payment is a larger payment. From there, you would have a premium schedule for 7 years total that would allow you to have the policy become fully paid-up life insurance, with no more payments due, but you would avoid the policy becoming a MEC.

A 1035 exchange from another insurance policy or an annuity:

A 1035 exchange may work in certain cases, but, in many cases, is not the optimal approach, given that it is often better to change an old insurance policy rather than replacing it in order to reduce or end the need to continue making payments on it.

However, in cases where you have built up cash value in a policy that is not right for your current circumstances, such an option enables you to convert that policy to a single premium life insurance policy that will not be classified as a MEC if the original policy was not considered a MEC.

Whole life non-MEC pre-paid premium policies:

It is possible to establish a non-MEC policy with one or two “pre-paid” payments. Part of the payment is kept in an account sponsored by the life insurance company that pays interest and is then added to the policy at a later time to prevent the policy being designated as a MEC.

Using a bridge loan to fund a whole life policy:

This approach involves placing a lump sum into a bridge loan contract, or several such contracts, that pay out cash flow on a monthly basis. This cash flow is then used to buy a non-MEC whole life insurance policy.

This strategy is subject to factors such as your age and health, among others, and offers the potential to provide you with greater growth and flexibility than would be the case if you simply used the cash to purchase a MEC.

Wrapping Up

We know that we’ve discussed quite a bit here in this article about Single Premium Life Insurance. The good news is that we here at I&E don’t expect you to now be an expert on all of it. All we hope Is that you’re now more familiar with this type of life insurance policy and understand that it might be something you’ll want to consider for you and your family.

The next step would be to give us a call and let us know what your goals are.  This way we can help you determine what type of coverage is right for you. So, what are you waiting for?  Give us a call today and see what I&E can do for you!