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Is Single-Premium Life Insurance Right for You?

Life Insurance
happy middle-aged couple walks along the beach and discusses buying single-premium life insurance

It's always good to have options — and there are a wide array of choices within the world of life insurance. But having too many options can sometimes lead to hesitation about choosing the right path.

What is the solution to this dilemma? Knowledge.

Understanding the basics of what's available could help you decide on the perfect policy for your needs. So, let's explore single-premium life insurance to help you determine if it's right for you.

What Is Single-Premium Life Insurance?

You know life insurance could help you provide financial security for your loved ones when you die, but you might not be familiar with single-premium life insurance. With single-premium life insurance, you pay one lump sum for your policy instead of spreading the premium payments out over a period of time and have a guaranteed minimum death benefit.

There are two types of single-premium life insurance policies available: single-premium whole life and single-premium variable life. With a single-premium whole life policy, you pay a single premium amount and are guaranteed a set interest rate. With a single-premium variable life policy, you choose the funds in which to place the policy, and the death benefit gains or loses interest together with the fund.

When Is It a Good Fit?

Let's say you're financially secure and receive a lump sum of cash from an inheritance, an employer buyout or some other source. Of course, you could put that money into the bank and let it collect interest. But another choice could be to purchase single-premium life insurance.

It's likely you won't miss the money if you're already financially stable, and the single-premium life policy could grow into a sizable amount, which you could then leave to your loved ones when you pass away.

If you are concerned about unexpected expenses eating up your savings in retirement, you could also consider single-premium life insurance, which could help provide funds for long-term care or certain end-of-life expenses.

Some policies allow policyholders to use the death benefit to pay for long-term care. The benefits could also be tax-free, depending on the policy and other variables. This could allow you to finance your care — and still leave something behind for your loved ones. And if the entire death benefit is not used for your care policies, your beneficiaries will receive the available death benefit amount. Also, some single-premium life policies allow policyholders with terminal illnesses to withdraw part of the death benefits.

You could withdraw cash from the single-premium policy. One thing to note about the withdrawal, however, aside from reducing or possibly eliminating the death benefit, is that you're required to pay taxes on the policy's value at the time. The Internal Revenue Service (IRS) may also assess penalties for withdrawal.

Any Special Considerations?

Those who buy single-premium life policies may also receive tax benefits. Consider this: If you buy a single-premium life policy that has a death benefit of $2 million, the benefit grows tax-deferred and can pass on to your beneficiaries when you die — free of income tax — according to Investopedia.

Still, the value of your estate would be reduced by the amount you paid for the policy. As a result, your beneficiaries could save a significant amount on taxes, both from your estate and the death benefit, on which they would not pay income tax.

Could a single-premium life policy be the right choice for your needs? Doing your research could help you decide in a world full of choices — and the financial security and tax benefits a single-premium life policy could provide might be just what you need.

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Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.