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How Does Single Premium Whole Life Insurance (SPWL) fit into Your Estate Plan?
The greatest benefit offered by purchasing life insurance is that it allows one to leverage funds to create an estate that can provide for survivors or to leave a legacy to charity. Single-premium whole life
(SPWL) is a type of life insurance in which a lump sum of money is paid into the policy in exchange for a death benefit that is guaranteed and paid-up until you die. In this article, we will look at SPWL, it's benefits and it's withdrawal provisions, as well as the drawbacks to an SPWL policy.
With single-premium whole life insurance, the initial cash investment builds up quickly because the policy is fully funded. The size
of the death benefit depends on the amount invested and the age and
health of the insured. From the insurance company's perspective, a
younger person is calculated to have a longer remaining life expectancy,
giving the funds paid in the premium more time to grow before the death
benefit is expected to be paid out. And, naturally, the larger the
amount of capital you initially contribute to your policy, the greater
your death benefit will be as well. For example, a 60-year-old female
might use a $25,000 single premium to provide a $60,000 income-tax free
death benefit to her beneficiaries; whereas a 50-year-old male's $100,000 single premium might give a $300,000 death benefit. As you will notice, the life insurance policy leverages your investment. In the examples above, you are more than doubling, and in one case, tripling the value of your savings for your family. This increased, tax-free pay-out would generally take years to accrue through normal savings.
Living Benefits
While
the death benefits of insurance policies provide you with an efficient
means to provide for your dependents, you also need to consider
unexpected expenses which can crop up in your old age. You probably understand the importance of long-term care insurance,
as long-term care can often turn out to be an expensive predicament.
But suppose you have put off buying this important coverage because you
can't bring yourself to pay the annual premiums? SPWL can offer a
helpful solution.
Some
SPWL policies will give you tax-free access to the death benefit through an accelerated benefit rider to pay
for long-term care expenses. This feature can help protect your other
assets from the potentially overwhelming cost of long-term care. The
death benefit remaining in the policy when you die will pass income-tax
free to your
beneficiaries. And if you don't use any of it, the money
will go to your loved ones just as you had originally planned.
Therefore, your SPWL plan allows you to cover your long-term care needs, while still leaving the maximum possible amount of your death
benefit intact for your dependents.
A number of
SPWL plans also include a feature that will let you withdraw part of the
death benefit if you are diagnosed with a terminal illness and have a
life expectancy of 12 months or less. This flexibility can make the
decision to sink away a large single-premium payment into a SPWL policy
less frightening for some, and it is important to consider if you
have limited financial assets other than your SPWL.
Single-premium whole life pays a fixed interest rate based on the insurance company's investment experience and current economic conditions.
In addition, many insurance companies pay dividends, which will add to your cash values, while increasing the size of your death benefit throughout your lifetime. These attributes help your policy to keep pace with inflation over the years.
Withdrawal Options
SPWL
policies give you control over your investment, allowing access to the
cash value for emergencies, retirement or other opportunities. One way
to tap into the cash in the policy is with a policy loan.
You can generally take a loan equal to about 90% of the policy's cash surrender value.
This will reduce the policy's cash surrender value and
death benefit, but you have the option to repay the loan and
re-establish the benefit.
Companies will also let
you withdraw funds and deduct the withdrawal from the policy's cash
surrender value. They usually have a minimum amount ($500 to $1,000)
that you can remove. The amount you can take out each year without
paying a surrender charge might be 10% of the premium paid in or 100% of the policy's gains, whichever is greater.
However,
an extra cost can arise from withdrawals or loans from your SPWL, since
single premium whole life policies are usually considered modified endowment contracts. This
means there is a 10% IRS penalty on all gains withdrawn or borrowed before age 59 1/2. You will also have to pay income tax on those profits. If you cash in the policy, the insurance company might hit you with a surrender charge if it is surrendered within the early policy years.
Tax Treatment
Your investments will grow tax-deferred inside the policy. As noted above, you will only pay tax
on the earnings if you withdraw or borrow from the policy. Your named
beneficiaries will receive the benefits income-tax free and
without the time delay and expense of probate.
This is an important benefit, as you do not want the effort and expense
you devoted to providing death benefits for your dependents to be muted
by undue time delays and probate costs.
Drawbacks
The
minimum amount you can invest in a SPWL policy is $5,000,
which can make it cost-prohibitive for many investors. Nor are
additions allowed. And you should only consider using
funds that you had intended to pass on to the next generation or to
help fund a long-term goal, such as retirement. If you have an older policy with accumulated cash value, you may be able to do a 1035 exchange and use the accumulated cash values to fund your SPWL. In addition, as mentioned earlier, it may make sense for you to move funds from a low-yielding CD. Also, you will have to meet the insurance company's medical underwriting standards to qualify for SPWL.
Conclusion
If
you have a lump sum of cash that you don't need right now, or you have an older policy that you're still paying on, and you are looking to increase
your coverage, and you want
guaranteed life insurance protection for your family or your favorite
charity, single-premium whole life insurance may be the ideal product for
you. It is also an excellent way to begin a child's life insurance
program.
For instance, you could
specify a child or grandchild as the insured and keep the policy in
your name. That way you would still have control over the cash value.
Or you could make him or her owner as a way to remove the policy from
your estate. However you choose to use a single-premium life insurance
policy, remember to consider your personal financial situation and
other retirement vehicles already in use so you can select and shape
your policy to best match your needs.
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