One growing trend for families in the Mountain State is single premium life insurance. What are the pros and cons compared to other forms of life insurance you can buy? Keep reading to find the best reasons (and a few drawbacks) on why you should purchase single premium life insurance.
Pros of Single Premium Life Insurance
Let’s look at some of the benefits of opting for a single premium policy.
Access to the Premium If Long-Term Care Is Needed
One of the highlights of going this route when purchasing insurance is the ability to access the money from the policy tax-free if it is needed to cover long-term care expenses.
The initial purchase can be used as a fallback option if you will be in need of long-term care at home or in a medical facility. In the instance that the money is not needed to cover your health expenses, the money will go to your beneficiaries without any income tax penalties.
The Value of the Policy Will Grow
Since a one-time payment is used for the purchase of single premium life insurance, the value of it should grow at a significant rate over time.
While your age and health are certainly a factor in the total amount of your benefits, this can make the policy worth up to four times as much money, over the length of the policy.
One way the value can grow is through a set interest rate agreed on at the time of the purchase of the policy. If the cash value increases then it may be to your benefit to borrow some of the cash without incurring a significant loss in penalties.
There may also be an option to grow the policy through a market index. This option can be worthwhile if you notice the trends in the market increasing over the previous quarters.
One Purchase Is All It Takes
Arguably the greatest benefit to single premium life insurance is that you only make one payment. This allows peace of mind for your family’s well being after your passing and also helps you avoid the trouble of making money or quarterly payments to the policy.
If you do not want to deal with the hassle of keeping up with these payments then the one-time purchase will be best for you.
Financial Aid Readiness
Did you think your single premium life insurance wouldn’t have an effect on your child’s financial aid? Think again! When filling out a FAFSA1 form for financial aid, any policies that have monthly, quarterly, or annual payments towards them count as cash assets for the household.
This can substantially reduce the amount of money your child can receive through financial aid. When you make a one time purchase on single premium life insurance it is not viewed as a cash asset by the federal government.
Cons of Single Premium Life Insurance
Now let’s look at some of the drawbacks of a single premium policy.
You Need a Large Amount of Capital
Although having the ability to purchase insurance can be an amazing benefit for your family in the long term. It is also important to know that it will come at a significant cost. These policies are not cheap and the capital used to purchase the policy could be used in short-term investments for your family.
No one is able to predict the future but if you purchase a premium and think the money could have been used another way, it may result in significant penalties when cashing out the premium.
One major drawback is the penalties you will incur when taking out some of the cash on the policy early. There will be a percentage penalty fee for the policy, as most policies will have it written in the contract that money cannot be withdrawn for “X” number of years.
Another thing to consider when deciding to withdraw cash from the policy is whether your age will have any impact on the amount of the penalty, as some policies can also apply extra fees if money is withdrawn before a certain age minimum.
After that term has passed you can withdraw money without a penalty from the insurance company, but there will still be income tax fees applied to the withdrawal.
Income Tax Penalties
As previously mentioned, if you make a withdrawal on your policy it will be subject to income tax fees. The only time you will not have to deal with these fees would be if the cash value of the policy goes toward your long-term health care.
To avoid these types of penalties altogether the best option would be to simply not touch the cash in the policy at all unless your health is at risk.
Is this the right fit for you?
How can you determine if single premium life insurance is what your family needs for the future? Let’s recap some of the good and bad about this type of insurance:
Only one payment is needed
Help with Financial Aid assistance
Penalty-free access to policy for long-term care
Penalties may reduce the policy value
Do you have more questions about single premium life insurance? Contact us today!