Most life insurance policies are paid each month for the period or term that you are insured, usually for 30 years or less. If you buy a traditional whole life insurance policy, you are responsible for the payments until you pass away. However, there is another type of insurance option where you can pay a lump sum, or one-time payment, to get the full benefit of an insurance policy.
Single-premium life insurance offers a guaranteed death benefit to your beneficiaries along with a variety of options for investment and withdrawal. The main advantage of single-premium life insurance is that you fully fund the policy – which allows the cash value to grow faster – and if you invest while you are young, there is more time for your money to grow.
Just like traditional term life insurance, the cost of a single-premium life insurance policy is determined by the amount of coverage being purchased, as well as the gender, health, and age of the person whose life is being insured.
Benefits you get while living
Every life insurance policy has an intended death benefit, which is meant to provide for your surviving family members in case anything happens to you. In addition to providing a death benefit, single-premium life insurance also offers to build cash value, which can be accessed by the policyholder.
Just like universal life insurance however, if you borrow money from your cash value, it is considered a loan and it will be deducted from the death benefit your beneficiaries will receive unless it’s repaid. When you pass away, your policy’s death benefit minus any outstanding loans will be paid to you family tax-free.
How does investment work?
There are two primary types of single-premium coverage: whole life and variable life; both offer varying investment options. A single-premium whole life insurance policy pays you according to a fixed interest rate, while a single-premium variable life insurance gives you the option to put your money into stocks, bonds, and other investment products – but it carries more risk.
Choosing an investment option depends on your capability to manage risk. A whole life policy is generally more conservative and low risk. On the other hand, variable life insurance has the possibility of greater gains, so if you’re a savvy investor, you might end up earning a lot more.
Limitations of single-premium life insurance
While a single-premium life insurance policy seems like a great concept, most people cannot afford to buy this type of coverage due to its cost. The life insurance companies that offer this product usually set a minimum single payment amount of about $5,000. In addition, not every company offers single-premium coverage, so the companies that do tend to have stricter medical underwriting guidelines. However, this is certainly an excellent option if you want to start early and build funds for retirement.
A single-premium life insurance plan is also perfect if you have some savings set aside in your bank account. The interest rates that the banks are currently offering are extremely low, so your money might gain more interest if you invest it into a life insurance policy.
This product also makes a great inheritance plan if you have young children. Regardless of your purpose for choosing single-premium life insurance, the most important consideration is to choose the correct policy type and investment vehicles that will best match your style and needs.