Single-Premium Whole Life Insurance

Some insurance companies offer single-premium whole life for people who have a large sum of money available to spend on insurance and who are looking for some tax benefits. You purchase the policy by plunking down one large sum for a specified death benefit. You don’t pay any annual premiums, and the death benefit either remains constant or increases, depending on the kind of policy you purchase. The insurance company takes your money up front, invests it, and pays you a small return, similar to what you get with other whole life policies.
Like other whole life policies, a cash value does accrue, usually with a guaranteed minimum return. When the insured dies, the death benefit plus any accrued cash value goes to the beneficiaries.
If you’re sitting on some cash and you want to buy life insurance, consider this option. In essence, you pay all your premiums up front with single-premium whole life and then let the company have use of your money for the entire period. In exchange, you get a few benefits that may be important to you:

• You get a substantial discount on the cost of the insurance itself. Your lump-sum payment is less than the accumulated cost of annual premiums on comparable whole life policies.
• You get a significant tax savings. The tax savings may be the primary reason that people purchase this kind of life insurance. All the money you earn on your single premium whole life policy is tax-deferred.
• You can immediately borrow against the cash value in your account. And if you only borrow against what the cash value itself earns, then you will likely pay approximately the same interest the cash value earns, as well. Thus, by storing some money in the company’s coffers, you give yourself the opportunity to take out a loan virtually interest-free.

Don’t purchase any kind of insurance policy based on the rate of return or tax benefit you receive. If you don’t need or want life insurance, you need to look into other, more profitable methods of saving money or lowering your tax burden. If you borrow against your whole life insurance policy, you need to pay particular attention to the potential tax consequences. If the amount you borrow includes any of the taxdeferred gain (the interest you’ve accrued), you may have to pay taxes on the gain. Check with your tax advisor before exercising this option.