Understanding the advantages of single premium life helps consumers make the most educated decision. Here are the 8 major advantages that should be considered when considering single premium life insurance:
- The initial guaranteed rate in a single premium policy generally is quoted “net” of commissions and other fees. Therefore, the policyowner’s entire premium goes into the cash value.
- Cash value interest or earnings accumulate tax-free or tax deferred, depending on whether gains are distributed at death or during lifetime.
- Single premium current assumption life insurance (and ordinary life, through dividend formulas) frequently pays higher interest on cash values than are available from tax-free municipal bonds.
- Variable policies give the policyowners wide discretion to direct the investments that back the cash values by selecting among various types of mutual-fund-type investment assets.
- In current assumption policies and ordinary policies, cash values are not subject to the market risk associated with longer term municipal bonds and other longer term fixed income investments. Although policyowners can expect the interest the insurer credits to cash values to vary with market conditions, the cash value itself will not be subjected to the market value swings associated with market prices of longer term fixed income investments.
- Policyowners can borrow cash values at a low or zero net interest rate cost.
- Policyowners can use life insurance policies as collateral or security for personal loans. Note, however, that because single premium policies issued after June 20, 1988 are likely to be MECs, the tax rules treat loans or amounts received through collateral assignments of these policies as “amounts received under the contract.” Therefore, the amounts received generally will be subject to the ordinary income tax and, if received prior to age 59½, subject to an additional 10% penalty tax. Income and penalty taxes apply only to the gain in the policy.
- Policies issued before June 21, 1988 are “grandfathered” from the MEC rules.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM