When individuals and families make major purchases, such as buying cars or buying a home, these purchases are often paid over time in what are called “installments.” This allows you to buy a high dollar item, paying over an extended period of time, when you might not otherwise ever be able to accumulate the funds necessary to pay for such a purchase in cash. It’s no different when talking about life insurance. If you’re taking out a life insurance policy, whether term or whole life, chances are good you’ll be making ongoing regular premium payments, whether these are paid monthly, quarterly or annually. For some people, however, it makes sense to take out a single premium life insurance policy (SPL). Here’s how SLPs work.
Features of Single Premium Life Insurance
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- One premium payment is made, at which time the policy is paid in full with no further payments required
- Once the premium payment is made, it creates instant cash value that can be used as collateral toward a loan
- There’s an accumulation of cash value every year and the policy is eligible to receive dividends (if paid) at the end of the second year
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Pros and Cons
Like most things, an SLP has both advantages and disadvantages that should be weighed prior to taking such a policy out. They’re as follows:
Advantages
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- The most important benefit of an SLP is that the death benefit paid is tax-free. This money can go to your heirs without the necessity of going through probate
- Provides constant, stable growth due to a fixed, guaranteed interest rate
- Money within the policy accumulates tax-free if not withdrawn
- No concerns that the policy may lapse due to non-payment of premium since no premium is due at initial payment is made
- A portion of the death benefit may be accessible to pay for terminal or chronic illness care
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Disadvantages
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- The cost can be prohibitive
- Strict medical qualifications are required
- The fixed rate of interest may provide protection when the market is on a downswing, but when the market is bullish, investment returns are still fixed at the same rate
- If withdrawals are made before you turn 59 1/2 years of age, the IRS will charge a 10% penalty
- If the policy is cashed out, certain surrender charges will apply
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Before making a decision to take out an SLP, it’s a good idea to consult with your insurance agent and/or tax professional.