Single Premium Life Insurance

A single premium life policy is a life insurance policy that has exactly one lump sum payment upfront (to the insurance company) for a higher death benefit paid to the beneficiaries at the time of the insured's death. For example, Beth (the insured) takes $10,000 out of her savings account and takes out a single premium life policy with Better Life insurance Co. Since Beth is 34 years old, does not smoke and is in great health, the insurance company took her money and issued her a policy for a death benefit of $90,000. Beth receives her policy and does not make any additional premiums to her insurance company (after her first and only $10,000 payment). At the time of her passing, Better Life Insurance Co, pays the death benefit of $90,000 to her named beneficiary (i.e. daughter, husband, parents, charity etc).

Many people may ask the question: why put up so much of the money now as opposed to making smaller monthly premium payments? Well there are a number of reasons as to why someone would choose to put a lump sum into a policy.

First, it is often used as a rollover option from existing old policies. When people have older whole life (and some universal life) policies that they've carried for a long time, they'll find that the cash value in their policies has grown to significant amounts. The insurance industry, over time, has noticed that, due to advances in medicine and medical technology, people are living longer. Because of that fact, life insurance, over the years has significantly dropped in costs. This leads to the cash value in older policies being able to buy more death benefit for the same amount of money. Granted the insured is in good health, he/she would see the significant gain by rolling over existing policy benefits (cash value) into a newer paid-up (single premium) life policy.

The second reason people cough up the money upfront, is for a gift. The recent trend has been for grandparents and godparents to take small lump sums and buy paid-up or single premium life policies for their grandchildren or friends' kids.

The third major reason for paying into a single premium life policy is to hedge taxes. Many parents see that leaving behind money that's in accounts and in other assets to their kids and beneficiaries could have a large impact on their beneficiaries' estate taxes. So the nice gesture that was left behind as a legacy to their loved ones could end up becoming a tax liability and a major headache. Since life insurance death benefits are TAX FREE to the beneficiaries, this move could either keep them out of a higher tax bracket or help pay the estate taxes.

Modified endowment contracts are life insurance policies under which the gross premiums paid at any time during the first seven years exceed the sum of the annual net level premiums under the new statutory 7 pay test. Your plan of insurance, as proposed, would fail that statutory test.

Are you still confused? Me too. So here is what that means in plain English: What you pay into a life policy can't be more than the minimum required to keep the policy active for 7 years. If it is then cash value proceeds when withdrawn, would get taxed as income first then principal last. This could cost you so have your agent run a test to make sure it passes the 7 pay rule.

Why is this 7 pay test so important?

Well, it ultimately prevents people from overfunding their policies with excess cash so when the policy benefits are passed down to their beneficiaries, it avoids tax consequences. This was a way for the rich to leave more money behind for the kids and trick Uncle Sam out of his cut. So the lesson here is, a modified endowment contract is avoidable, just make sure a licensed agent is running this test for you to avoid a huge tax bill

So you dusted off your old life insurance policy, that you've had in the safe for the better half of the century, and you're wondering what you should do next. First thing's first, call the company! I mean it. Call them right now! If it's an old policy, chances are it needs some updating. Here are a list of things that could have changed since the last time you reviewed it (which was probably the first time the agent delivered the policy):

1) Insurance company went out of business and sold your policy to another company. Don't panic, with the help of google and yellow pages, you can track down the company.

2) Your agent is no longer contracted by the company. No sweat, request another one to come out and review your policy.

3) Your contact information hasn't been updated in 45 years. You've probably moved 4 times, changed phone numbers and gotten married and inherited a different last name. That would make it a little difficult for insurance companies to find you and even more difficult to find your beneficiaries. Have the agent update your information.

4) Policy has expired! Or is soon to expire at the rate it's earning interest...or not earning it. Your premiums or cash value may not be working with the policy premium requirements. Have a few illustrations drawn up by the company and mailed to you for review.

5) Have you updated your beneficiaries? This is probably the most important point. If they were young children when you took out the policy and are now adults, then consider this: Have their last names changed due to marriage? Have they moved? Changed phone numbers? Are they still alive? Don't wait on this. Update immediately.

So assuming you addressed all these concerns, immediately like advised, what's the next step?

Have your agent/financial advisor perform an UPDATED financial/insurance needs analysis with you? This comprehensive look at your financial picture will help him/her advise you better.

So you've decided to meet with an agent and perform a comprehensive review. Good for you. Here's what you'll need to get ready for that appointment:

1) Call the insurance company and get a "Summary of Benefits" over the phone. This consists of information they can tell you right over the phone like modal premium, cost of insurance, cash value, cash surrender value, expiration date, and any existing riders.

2) Be very honest with your agent about your health. Don't leave anything out, it's all relevant.

3) When your agent asks you about other life insurance policies you may have with other companies, be very honest with them. They're not being intrusive out of random curiosity, they are asking because it is relevant. Many companies use reinsurers and may already be tied up in insurance deals with the company you're dealing with. This will help determine the likelihood of you getting extended coverage in terms of a Single Premium Life policy.

4) Finally, be prepared to fill out an application. This will determine whether you are eligible, health-wise, for qualifying to get the proposed coverage amount. If your health is less than perfect, you maybe rated below par and either counter-offered a lower death benefit or denied altogether. Either way finding out what you qualify for is important and not worth waiting for. The application process usually does not require a premium or deposit and even after you say YES and sign on the dotted line, you have 30 days to change your mind. In short, you have nothing to lose, submit your application.