What is Single-Premium Life Insurance?
Single-premium life insurance (SPL) is a permanent life insurance policy that gets paid for in full at the time of policy purchase via a lump-sum premium. The policy owner then doesn’t have to worry about making premium payments moving forward.
Understanding SPL coverage
With most life insurance policies, the policy owner makes ongoing premium payments (e.g., on a monthly or annually basis) to keep the coverage in force. If they miss a payment, the policy can lapse, voiding the coverage.
With SPL life insurance, things change. Because the policy owner meets their entire financial obligation to the insurance provider right away, the policy is guaranteed until the insured dies. There’s no concern that a missed payment could interfere with the coverage.
As you can probably guess, the main drawback of single-premium life insurance is the large sum of money required to purchase it (e.g., $25,000, $100,000). With ongoing premium payments, other life insurance policies allow policy owners to budget for the cost of the policy over time. With SPL insurance, you need to have a sizable chunk of money on hand.
Cash value in single-premium life insurance
Like most permanent life insurance policies, the majority of SPL policies come with a cash value component. The policy owner can access that cash, using it as collateral for a low-interest loan or even withdrawing it (the withdrawal will reduce the death benefit proportionally).
The way that cash value grows depends on the type of SPL insurance the policy owner chooses. If you pick whole SPL insurance, for example, the cash value will grow at a steady predetermined interest rate and may be eligible for dividends. If you choose variable SPL coverage, it will grow in accordance with the performance of the investment options you choose from the insurer’s portfolio.
While the cash value component of an SPL policy generally works fairly similarly to other permanent policies, there’s one difference of which you should be aware. The IRS considers SPL insurance a type of modified endowment contract. As a result, using the policy’s cash value may subject that amount to income tax and/or an IRS penalty.