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Choosing the right type of life insurance can help ensure your family’s security in the future. One type of payment option for many kinds of insurance would be single premium life insurance, which allows you to secure your family’s well being with just a single, lump-sum payment.
Here’s how it works.
The Difference Between Single Premium and Traditional Life Insurance
Traditional life insurance policies require the policyholder to pay premiums regularly (such as monthly or yearly throughout the life of the policy). If the policyholder dies, his or her beneficiaries receive a benefit payment.
In contrast, single premium life insurance doesn’t require regular premium payments. Instead, the policyholder makes a lump-sum premium payment upon purchasing the policy. No additional monthly or annual payments are due. When the policyholder dies, his or her beneficiary receives a benefit payment.
What Benefits Does Single Premium Life Insurance Offer?
As soon as a single premium life insurance policy becomes effective, cash value exists. The larger the initial premium payment, the larger the death-benefit payout will be. Because the initial premium is a large lump sum of cash, the cash value compounds and grows quickly.
While the cash value grows, it remains tax-deferred. Generally, the death benefit passes on to beneficiaries’ income tax-free.
The size of the death benefit depends on a number of factors, including the size of the lump-sum payment and the age of the policyholder. The younger the policyholder, the more time that exists for the cash value to grow.
Two Ways That Single Premium Life Insurance Cash Value Can Grow
1) Single premium policies can accumulate in cash value based on a fixed rate for the life of the policy. Policyholders who want to avoid risk and market fluctuation may decide to choose this option.
2) Single premium “variable life” policies can accumulate cash value based on current market rates. This type of policy allows the policyholder to choose the way the funds will be invested and managed but is subject to the ups and downs of the financial market.
Many single premium insurance policies include provisions for access to the cash value of the policy in case of illness, disability, retirement or other situations that require ready cash.
Whichever type of insurance policy or payment option you choose, be sure to compare several options and to do your research before making a selection. It’s important that your family’s life insurance policy fits your current budget and serves your future needs.
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