A Single Premium Whole Life (SPWL) insurance policy works just like it sounds – you purchase the contract with one premium upfront. For folks who haven’t carried life insurance since the kids moved out of the house and their term life policy ended, SPWL offers some flexible financial planning options.
First of all, rather than taking a sizeable chunk of savings to purchase a policy, it’s a good option if you come into a windfall, such as an inheritance. This way you can take a lump sum and convert it into your own legacy for your children.
However, you can tap money from the account if you need to. Part of the initial premium goes into a cash account, which is available for either withdrawals or a policy loan. This account earns interest, so the longer you leave it alone, the larger it will grow. If at some point you need emergency funds and wish you had that inheritance back, much if not all of it is available for your use.
Here’s a sample illustration of how SPWL works. Premium: $100,000
| Policy Year | Cash Value Available | Guaranteed Death Benefit |
| 1 | $77,282 | $212,314 |
| 5 | $89,809 | $212,314 |
| 10 | $106,582 | $212,314 |
| 15 | $123,567 | $212,314 |
| 20 | $139,703 | $212,314 |
| 25 | $155,839 | $212,314 |
| 30 | $169,639 | $212,314 |
As you can see in the accompanying table, you would have access to much of that initial premium right away, and the equivalent amount within 10 years.
Benefits
As you get older, you might find you have expensive medical bills or need caregiving assistance. Not only is your cash value available for these expenses, but if you have significant needs, you can borrow against the death benefit. While this reduces the amount your heirs will receive upon your death, they’d probably rather you use that money than rely on them to pay your bills.
Another huge benefit for people living on a fixed income during retirement is that by purchasing the policy with an initial lump sum, you aren’t burdened with ongoing premiums. Since the policy is purchased in full, there is no risk of future default.
Tax Status
The death benefit from a single premium whole life policy is not subject to income taxes for the beneficiaries, but it could be subject to estate taxes on large estates. The cash value account grows tax-deferred; however, SPWL is classified as a Modified Endowment Contract (MEC) because it is paid via a lump sum premium and therefore exceeds IRS limits for how much you pay into a life insurance policy all at once. This means that any money withdrawn or borrowed from the policy is considered “last- in first out,” so capital gains are taxed. Also, withdrawals and policy loans made before age 59½ may be subject to an early withdrawal penalty.
Many of today’s SPWL policies feature long-term care benefits and/or riders. These enable tax-free access to the death benefit due to a qualifying event, such as a terminal illness in which the policyholder becomes unable to perform two or more activities of daily living and needs long-term care.
Be aware that accelerated death benefits and long-term care riders are subject to underwriting approval, so it’s important to purchase a policy while you are still young and healthy. As always, contact a professional to make the best decision for your circumstances.
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