Alternatives to Single Premium Life Insurance

All life insurance policies can provide tax-free cash upon death. The unique feature of single premium life insurance is its large tax-free or tax deferred cash buildup. If a person desires a combination of high tax-preferred cash accumulation and life insurance coverage, they should consider exploring several others:

  1. The combination of a single premium deferred annuity and decreasing term insurance – Cash values accumulate in both annuities and single premium life insurance policies on a tax-deferred basis. Withdrawals, lifetime distributions, or loans from each are treated similarly for tax purposes (assuming the life insurance policy is treated as a MEC). Therefore, the combination of a single premium deferred annuity and a decreasing term policy can provide levels of tax-preferred cash accumulation and death benefits similar to a single premium policy.

However, there are some important differences. The annuity-term combination will require some additional and increasing premiums over the years for the term coverage. In addition, the mortality charges for term insurance coverage are typically higher than the mortality charges in a single premium policy. Also, loan provisions of deferred annuity contracts are generally more restrictive than those of single premium life policies. Finally, the death proceeds from the single premium policy generally may pass to the beneficiary entirely income and estate tax free, regardless of who is the beneficiary, if the policyowner has no incidents of ownership in the policy. The gains on the annuity contract still will be taxable income to the beneficiary.

  1. A combination of tax-free municipal bonds and decreasing term insurance – This combination can create a cash accumulation and death benefit similar to a single premium policy. In contrast with the cash values in a single premium policy, bond owners may use the municipal bonds as collateral for loans without any adverse income tax consequences. Similar to life insurance policy loans, the interest paid on the borrowed funds generally is not deductible. Death benefits from a single premium policy transfer by operation of the contract and avoid probate. Municipal bonds are part of the probate estate and must be distributed by will. Once again, if the policyowner has no incidents of ownership, the life insurance death proceeds are paid estate tax-free. The municipal bonds will escape estate tax only if they pass to the spouse and, thus, qualify for the estate tax marital deduction.
  2. A single payment universal life policy – The insurer and policyowner initially can configure a universal life policy to resemble a single premium life policy. However, in contrast with “true” single premium life policies, charges for mortality and expenses can change in the universal life policy in such a way that the policyowner would be required to pay additional premiums in the future to maintain the face value of coverage.
Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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