How Does Single Premium Life Insurance Work?

Single premium life insurance is a type of insurance in which you fund the entire policy with one payment. This is in contrast to a traditional life insurance policy where you make regular premium payments over an extended period of time. This type of life insurance can provide you with good coverage and is also a method that individuals use in order to transfer wealth. Here are the basics of how single premium life insurance works.

Single Premium Life Insurance

Single premium life insurance is a product that you can buy with a large lump sum of money. Once you make your initial payment, you own a policy with a specific death benefit and cash value amount. Typically, once you make your first payment, the policy goes into effect and will remain in effect indefinitely. Most life insurance companies will have a minimum amount of money that you can use to purchase a single premium life insurance policy. For example, they might have a $10,000 minimum on a single premium life insurance policy.

Lump Sum

Many people will utilize this type of life insurance policy when they are given some type of lump sum. For example, if you win the lottery or gain an inheritance, you can put a portion of it into this type of policy. Instead of having to worry about making regular monthly premium payments, you can get all of your payments out of the way at once. This makes the process much easier and it provides you with a paid life insurance policy that you can use in the future.

Cash Value

Many people will use this type of policy as the vehicle to protect their wealth from taxes. When you purchase a single premium life insurance policy, it will have a cash value that is slightly below the amount of money that you have invested. As that money is invested in different securities, the cash value can grow. With this type of policy, you can actually gain access to the cash value of the policy through a policy loan. A policy loan is a type of loan that will allow you to borrow against the cash value of your policy. These loans are beneficial in that they come with low interest rates and you can pay them back on flexible terms.

By using a policy loan, you will also be able to avoid paying taxes on the money. It is looked at as a type of loan that does not count as income when you file your taxes. Therefore, if you are awarded a lump sum of money, you could put a large portion of it into a single premium life insurance policy. You would then be able to avoid paying capital gains taxes on the large lump sum of money and you would still have access to the money any time that you need it. 

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