What is a Single Premium Policy?

There are a number of options available when choosing life insurance. A single premium policy is an option that allows a person to invest a lump sum so that the policy is always paid up. This eliminates the need to be concerned with periodic payments, or the negative outcome that can result from missing periodic payments with other types of policies.

There are different types of single premium policies to suit different investment styles. A single premium whole life policy pays a fixed interest rate. A single premium variable policy has payment rates based on fluctuating factors, such as stocks and bonds. Since this type of account is subject to market changes, it is less secure than a whole life policy.

Similar to other life insurance options, a single premium policy has benefits that tend to vary depending on age and health. Normally, the younger and healthier the person is who the policy covers, the greater the death benefit will be. This is because a young and healthy person is expected to be alive longer than an older, sicker person. The longer a person lives, the more time the investment has to grow.

Another factor that determines the death benefit is the amount of money invested. More money invested should result in a higher return. This is because larger sums accrue greater amounts of interest.

To make investing in a single premium policy more attractive, many of them include encouraging withdrawal options. Some single premium policies allow the person who is covered to withdraw money needed for long-term care. Other policies allow the person who is covered to withdraw funds in the event that he or she is diagnosed with a terminal illness and expected to die within a year.

Withdrawals from a single premium policy are usually not tax free. If the owner of the policy borrows money from the policy, the funds are typically considered earnings, and taxes must be paid. Another downside of single premium policies is that, although they offer flexibility regarding withdrawals, additions cannot be made. The lump sum paid is the only money that the covered person is allowed to invest. Thereafter, growth is limited to the accrual of interest.