Single Premium Whole Life Insurance FAQs

There are questions surrounding single premium whole life insurance. Life insurance is a big deal in any household. Without it, you’d have to worry about your loved ones. There are many options to choose from when it comes to buying life insurance. Our experts answer some questions revolving around this topic.

Question – Is single premium whole life a good idea for an individual who does not need death benefit coverage?

Answer – Probably not. A single premium policy does provide a death benefit, which means the client is paying mortality charges. If the client does not need or want life insurance protection, a single premium deferred annuity can provide similar tax-sheltered cash buildup benefits without the mortality charges.

Question – How can insurance companies guarantee higher rates of interest on single premium policies than on other life insurance policies?

Answer – The insurance company receives the full premium that will be paid under the policy at the beginning of the contract. This permits it to invest the money in long-term assets with fairly certain or predictable long-term returns. These longer-term assets generally pay a higher yield than shorter-term investments. In addition, regulations permit the insurance company to base its reserve calculations on rates as high as 6 percent annually for single premium policies. The upper limit on assumed interest rates for reserve calculations is lower for policies with periodic premium payments.

Question – Is a single premium life insurance policy a good short-term investment?

Answer – Not generally. Single premium policies typically have significant surrender charges in the early years. Also, because newly-issued policies are likely to be MECs, if the policyowner terminates the policy before age 59½, he or she may incurs a 10 percent penalty tax in addition to the income tax payable on any taxable gain from the terminated policy.

Question – Do the bailout provisions found in some single premium life insurance policies make them good short-term investments?

Answer – Bailout provisions may eliminate or reduce surrender charges imposed by the insurer, but they cannot waive the penalty tax applicable to persons under age 59½ or return the mortality charges incurred within the policy. Generally, better short-term investments are available without the mortality charges and the potential penalty tax.

Question – Does MEC status of a single premium policy affect the taxation of the policy death benefit?

Answer – The MEC rules have essentially no effect on the taxation of death benefits. The death benefits generally are exempt from federal income tax, and federal estate and gift taxes are applied in the same manner as for policies that are not classified as MECs.

Question – Is a single premium policy with an interest rate guarantee that is for a longer period than competing policies necessarily the “best buy” of those available?

Answer – Not necessarily. The long-term performance is most important. Insurers have wide discretion in setting the interest rates they credit to policies after the guarantee period expires. It is possible to promise high rates for the initial guarantee period and then compensate for that early promise by lowering the rates credited after the guarantee period expires.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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