If you’ve ever gotten a quote from a life insurance agent, you’ve probably been quoted monthly or annual rates.
For example a 45 year old might expect to pay $50 to $100 per month for $100,000 policy with level premiums for life.
But what if your agent came back to you and said… “OK, that will just cost $12,257.”
You, my friend, may have been quoted a single premium life insurance rate!
What is Single Premium Life Insurance?
It is just what it sounds like. You pay one single premium, and your policy is guaranteed to offer a level death benefit for as long as you live without having to pay another premium.
It can only be used to purchase permanent policies such as guaranteed universal life or whole life.
Buying a single premium policy can offer you fantastic savings over paying premiums for the rest of your life, so if you think you’ll live a long time and can foot the bill, it could make sense for you.
The downside is that if you pay your single premium, and get hit by a truck tomorrow, you will have grossly overpaid for your life insurance, since the death benefit does not change regardless of premium mode.
Due to its high cost and the fact that you can’t get a “single premium term” policy, it’s not very commonly used, except in estate planning.
When Does a Single Premium Policy Make Sense?
Let’s compare two quotes:
- Male, Age 40, Best Health Class Non Tobacco – For a $500,000 Policy with Guaranteed Level Premiums for Life – $2,493 per Year
- Male, Age 40, Best Health Class Non Tobacco – For a $500,000 Policy with a Single Premium - $45,402 Single Premium
In this instance, I would say the single premium policy makes a lot of sense. A 40 year old in great health will live on average 45 years.
So rather than paying $2,493 for 45 years, which would be over $110K, our 40 year old pays a single premium of $45,402.
Using a Single Premium Policy in Estate Planning
Ok, here comes the fun part.
If you’re an affluent individual, you’re probably aware of the estate tax laws.
Let’s assume you’re, 50 years old, in good health, married and have a net worth of $11 million dollars. With proper estate planning, you should only have to pay estate taxes on $1 million dollars, by using both your and your spouse’s unified tax credit.
But that $1 Million is going to cost your estate $350,000! So that last million becomes $650,000 after taxes.
Here’s an idea for you. You won’t believe this. Life insurance is such an incredible leveraging tool.
If you have the liquid cash to pull this off, here’s what you could do:
- Purchase a $1 million dollar guaranteed universal life insurance policy with a single premium of $133,114.
- You could have the policy owned by a life insurance trust, therefore separating the $1 million death benefit proceeds from your estate.
- Your taxable estate would be reduced by the amount of premium you spent on life insurance, so your new taxable estate would be $866,886 and estate tax due would be $303,410. So your estate tax is almost reduced by $50K!
- Then your family takes your $1 million death benefit to pay the estate tax, which leaves them with $696,590.
- Now your family inherits both your estate of $866,886 and the life insurance proceeds (after paying the taxes) of $696,590. Add them together and that’s $1,563,476.
So the question is whether your family would prefer to have $1.5 Million or $650,000.
Of course, you could buy other amounts than $1 million of life insurance. You could take the entire $1 million that is taxable and put that into a life insurance policy.
A $1 million premium would buy you the following amounts at the following ages:
40 years old -approx. $12 Million
50 years old – approx. $8.5 Million
60 years old – approximately $5 Million
70 years old – approximately $3 Million
To sum it up, single pay life insurance is a way to quickly reduce your taxable estate, and leverage that money into a life insurance policy whose death benefits may be estate tax free.
Alternatives to Single Pay
Since some people don’t like the idea of the single pay, but might also not like the idea of paying life insurance premiums the rest of their lives, you could look at a 10 pay policy or 20 pay policy. These are excellent alternatives.
For a single premium life insurance quote, please call us at 877-996-9383 or get started with a quote request using our form on the right.