Single Premium Whole Life Insurance

Single Premium Whole Life Insurance is permanent cash value whole life insurance that is purchased with a single large premium. When participating ordinary whole life insurance is configured as a single payment policy, the policyowner is guaranteed that:

  1. They will never have to pay additional premiums to keep the policy in force.
  2. The face value of the policy will never decline.
  3. The cash values will grow exactly as shown in the schedule in the contract. The cash value schedule is based on a guaranteed minimum rate of interest (historically, between about 4 percent and 6 percent, but lower in recent years because of relatively lower market rates of interest). The guaranteed rates for single premium policies historically have been generally higher than those guaranteed on policies with continuous premiums.

The policy also generally will show a schedule of projected dividends. The dividend schedule is not guaranteed. If the company’s investment and mortality experience is favorable, dividends paid on the policy may be higher than projected; if the experience is unfavorable, dividends may fall below projections.

Policyowners typically use dividends paid on participating single premium ordinary whole life policies to buy “paid-up additions,” which are essentially just small additional single premium policies. In general, policyowners can expect the total face amount of coverage to increase over time. Also, the paid-up additions build additional cash values that increase the total cash value above that originally projected in the basic policy. In some cases the policyowners can use dividends to buy additional term insurance without evidence of insurability that, over the years, can substantially increase the face amount of coverage.

Because all newly purchased single premium policies are likely to be MECs, dividends paid to the policyowner in cash or retained by the insurer to pay principal or interest on a policy loan are treated as payments received under a contract and may be subject to income tax.

Although some stock companies have offered nonparticipating single premium policies in the past, these policies are virtually nonexistent today, having been replaced in most instances by single premium current assumption whole life policies.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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