In the mid-20th century, many people looked at whole life insurance as a long term investment as well as a way to provide financial protection for their families. Cheap term life insurance rates made it an attractive alternative and the investment value of whole life insurance was overlooked. Not surprisingly, recent financial upsets have investors returning to the low risk, stable returns of single premium life insurance.
Unlike traditional term, universal, or whole life insurance, single premium life insurance is paid in one lump sum with no monthly, quarterly or annual premiums. The amount of the death benefit depends on your age at the time the policy is issued and the amount of your investment.
If a policyholder chooses not to withdraw dividends paid on the policy, they are reinvested in additional paid up coverage with the same terms as the original policy. Because the policy is paid up in one large, lump sum, the investment grows quickly and continues to grow until you die or withdraw the cash value.
A Low Risk, Low Maintenance, Tax Deferred Investment
Since life insurance companies are highly regulated by the government, there is very little risk associated with whole life insurance investments. The insurance company automatically invests uncollected dividends and the policy’s cash value compounds, resulting in higher returns. The best part is that a life insurance death benefit is paid out tax free, so the greater your initial investment, the greater your death benefit will grow.
Using Accrued Cash Value As Collateral For Loans
In most cases, policyholders can use up to 90% of the accrued cash value of their policy as collateral for a loan. During the term of the loan, the policy does not pay dividends on the borrowed amount and the death benefit is reduced by the outstanding loan value.
Nonetheless, the life insurance benefits of the policy remain in effect and the coverage resumes payment of dividends as soon as the loan is repaid. The advantage is that investors have the flexibility to use funds as needed, such as for a down payment on a house, college tuition, etc.
Taxes and Penalties
With single premium life insurance, similar to any whole life policy, the cash value investment grows tax-deferred. However, if withdrawn, policyholders face taxes and penalties. In addition to income tax, the IRS may assess a 10% penalty on dividends withdrawn by the investor before he or she reaches the age of 59 ½. This penalty applies to all types of retirement accounts.
The penalty does not apply to loans against the policy since no dividends are withdrawn. It also does not apply if the funds are moved to a different retirement investment account.
Nevertheless, upon your death, your beneficiaries will not pay any taxes on the death benefit payout since death benefit payments are non-taxable.
Single Premium Life Insurance
As a long term investment, single premium whole life insurance policies offer a number of pros and cons, especially advantages for people with limited investment experience. In addition to being an investment vehicle, these policies offer financial security for the policyholder’s heirs. Before buying life insurance, remember to compare companies and quotes to find the best rates and options.