An underutilized tool in the fight to grow, protect and transfer assets is the single premium life insurance policy. Single premium life insurance is a type of permanent life insurance that involves making a one-time payment to the insurance company to secure a policy that remains active for your client’s lifetime or until they choose to surrender it.
Here’s a breakdown of how it works and some key points to consider:
How Single Premium Life Insurance Works
You make a single lump-sum payment to the insurance company when you purchase the policy
The policy accumulates cash value immediately after your payment, usually on a tax-deferred basis, some policies can provide immediate access to the cash value – i.e. immediate liquidity for your client.
The cash value can grow over time, depending on the type of single premium policy you choose (whole life, universal life, or variable life).
You can borrow against the cash value of the policy if you need funds. You can choose to pay back the loans or not. Unpaid loans are deducted from the policy’s death benefit.
When you pass away, the insurance company pays out the death benefit to your designated beneficiaries, which includes the policy’s face value and any remaining cash value. This payout is tax free to the beneficiary.
Types of Single Premium Life Insurance
Single Premium Whole Life Insurance: Offers a guaranteed death benefit that lasts your entire life and provides a fixed interest rate for cash value growth.
Single Premium Indexed Universal Life Insurance: Cash value growth is dependent on the stock market’s performance and offers higher potential returns but also higher risk.
Single Premium Variable Life Insurance: Provides flexibility and control over investment options but comes with the highest risk.
Benefits of Single Premium Life Insurance
You make one upfront payment and avoid ongoing premium payments.
Cash value accumulates quickly, allowing for early borrowing if needed.
No risk of policy lapse due to missed payments.
Tax-deferred growth of cash value and tax-free death benefit.
Some policies allow access to death benefit for long-term care issues which provides leveraged dollars for that purpose.
Example of Single Premium Life Insurance in action (Roth Conversion Plan)
Facts:
Husband and wife, both 65, healthy and want to reduce the risk of personal income tax rates increasing, the impact of Required Minimum Distributions (RMD’s) and to maximize the legacy value of their assets.
It is projected that their social security will cover the cost of their fixed expenses comfortably for the next few years.
They have $1,000,000 in tax deferred retirement assets and $500,000 in investments including $200,000 in CD’s coming due.
Solution:
Move the funds from the CD’s to a single premium life policy on husband where the cash value will grow at a similar rate in a tax free environment.
Begin a Roth conversion plan converting $50,000 per year for the next 10 years with the taxes on the conversion paid by taking funds from the cash value of the policy.
This solution maintains their overall market risk profile, provides tax free funds to pay for the conversion now, and death benefit that would pay the tax on conversion at a later time at husband’s death if the plan is not completed so that the surviving spouse can convert it at a later time passing the Roth accounts on to the children tax free at her death.
In summary, single premium life insurance can be an option for your clients with a substantial amount of money to invest for the long term and seek tax-advantaged growth with a guaranteed death benefit. It is an alternative to CD’s, Bond Funds, Money Market Account’s and other cash like savings.
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