Having a life insurance policy will give peace of mind to its policyholders. This insurance will ensure that their dependents, i.e., partners and children, will be financially taken care of in the future. Life insurance policies are available in various types. One of them is the single premium whole life insurance policy.
This insurance is different from the regular life insurance policy. It provides specific covers that other life insurance types don’t provide. However, the single premium whole life insurance policy may not be suitable for everyone due to its pros and cons.
Single Premium Whole Life Insurance Policy: The Definition
A single premium whole life insurance policy is permanent life insurance where policyholders must pay an upfront lump sum payment in exchange for a guaranteed death benefit. Therefore, policyholders can get lifetime protection without paying premiums monthly or annually.
Moreover, the policy will build cash value over time. Therefore, beneficiaries of the policyholders will get a higher amount of benefit compared to the amount the up-front payment the policyholders pay.
Below are some key points about how the single premium whole life insurance policy works.
Who is Eligible for it?
The single premium whole life insurance is eligible for people of various ages. Some insurance companies offer this insurance for people age 0 to 85 years old.
Benefits
The main benefit offered by the single premium whole life insurance is a guaranteed income tax-free death benefit. In addition, it also offers a guaranteed cash value.
Single premium whole life insurance also allows policyholders to earn dividends from the investment of the up-front payment. However, it is not guaranteed. Policyholders can use the dividend for various purposes.
Some insurance companies also offer optional extra benefits. One of them is early access to a death benefit. This insurance allows policyholders to access this benefit when they are terminally ill.
Beneficiary
Policyholders must choose life insurance beneficiaries when they purchase a single premium whole life insurance policy. They can choose one beneficiary or split the death benefit among several beneficiaries. In addition, they have the freedom in deciding whether to split it equally or not.
What Happens When the Policyholders Die
The beneficiaries will receive the death benefit and the cash value when the policyholders die. However, the amount of the death benefit or cash value may not be similar to the amount promised by the insurance companies if the policyholders withdraw parts of the benefit in advance.
Single Premium Whole Life Insurance Cost
The cost of a single premium whole life insurance policy varies between one insurance company and the other. Some companies require a minimum upfront payment of $5,000. Meanwhile, others require a minimum upfront payment of $10,000.
The beneficiaries of the policyholders will get a much higher death benefit amount than the premium amount due to the cash value. However, the amount of death benefit depends on many factors, such as the age of the policyholders.
For example, a 60-year-old woman who pays for a $30,000 single premium whole life insurance will leave a $60,000 death benefit to her beneficiaries. Meanwhile, a 50-year-old male who pays a $50,000 upfront premium will leave a $200,000 death benefit to his beneficiaries.
Single Premium Whole Life Insurance Policy: Cash Value
The single premium whole life insurance policy commonly has a saving component attached to it. This saving component is the cash value. In this insurance policy, the cash value grows at a fixed guaranteed rate.
Moreover, it takes ten years or more for the policy to accumulate enough amount of cash value for the policyholders to use it. They can use the cash value in three ways.
1. Withdraw the Money from the Policy
Many insurance companies allow single whole-life insurance policyholders to fully or partially withdraw the money from their policies. However, doing it will lower the amount of the death benefit.
For example, when a policyholder has a $200,000 whole life insurance policy and withdraws $50,000 from his policy, his beneficiaries will only get a $150,000 death benefit from his policy.
2. Take out a Loan Against the Policy
Whole-life policyholders may take out a loan against the policy. Since it is a loan, policyholders must repay it with interest.
Policyholders who fail to repay it will leave a lower death benefit to their beneficiaries because the insurance company will take away parts of the death benefit to repay the loan.
3. Pay Premiums
This method of using cash value is only applicable to universal life insurance policyholders.
The Pros and Cons of Single Premium Whole Life Insurance Policy
The single premium whole life insurance is not suitable for everyone because it has some pros and cons.
1. Pros
- Guaranteed death benefit and cash value
- Policyholders can take out a loan against the policy.
- Policyholders do not need to pay a life insurance premium each month.
2. Cons
- Some people may not have enough money to pay a lump sum of a premium upfront.
- The single premium whole life insurance is for a lifetime. Therefore, policyholders cannot change their minds regarding the policy once they purchase it. They usually must pay a large surrender fee if they change their mind about this policy
- Policyholders may end up overpaying the insurance if they pass away sooner than expected. In this case, their life insurance policy doesn’t have enough time to accumulate cash value.
- The insurance companies do not allow for additional contributions to the policy.
What is a Single Premium Whole Life Insurance Ideal For
The single premium whole life insurance is ideal for:
- Those who are repositioning assets.
- Those who want to provide gifts for their children and grandchildren in the future.
- Those who want to gain value and earn dividends with a single payment.
A single premium whole life insurance policy is a permanent insurance policy that demands its policyholders to pay an upfront lump sum payment. This insurance offers a guaranteed death benefit and cash value.
Therefore, its death benefit amount is much higher than the single premium that the policyholders pay. This life insurance also offers several advantages, such as withdrawing the death benefit in advance and taking out a loan against the death benefit.