Close Close

Life Health > Life Insurance

The Case For Single Premium Life As A Legacy Maximizer

Your article was successfully shared with the contacts you provided.

Question: Say that some clients have accumulated a sum of money to pass to heirs or to charity, but they’re not sure what to do with it right now. How can they ensure the money will grow, maximizing their gift with no tax consequences?

Answer: Single premium life insurance.

SPL provides a simple and effective way for advisors to help clients pass a legacy on to heirs. The client makes a single premium payment; this locks in a tax-free death benefit that instantly increases the amount of their estate. Additionally, since many SPLs have living benefits features, the client can gain access to their money if they need it, say, for chronic care expenses or in event of terminal illness.

The role of SPL is becoming increasingly important because within the next 20 years, the United States will experience the greatest wealth transfer in its history. Today’s 76 million-plus estates having values under $1 million are prime target areas for the SPL solution.

With its tax-deferred growth and tax-free distribution to heirs, SPL offers significant advantages over other savings vehicles. Consider:

Other fixed investments, such as annuities or bank certificates of deposit, require time to grow and, after taxes, they provide less money to heirs. With SPL, policyowners immediately increase the amount they will leave to beneficiaries; they will also have access to their money if they need it, as noted above (see Table 1).

In addition, clients can have the peace of mind of knowing that their death benefit is guaranteed (as long as no loans are taken). Depending upon the interest rate credited to the policy, the face amount may actually increase in later years and provide an even larger payout to heirs.

Consider a 64-year-old woman, rated standard nontobacco. If she puts $50,000 into an SPL, the money instantly creates a $99,602 death benefit that her beneficiaries will receive tax-free. Had she put that into a taxable investment, she would only pass on $83,953 after 20 years, and that amount would be taxable to heirs (see Chart 1).

SPLs may also include other value-added features to discuss with clients. Those features can include:

o Simplified underwriting. The advantages are short applications, no fluid requirements and a quick issue process.

o Accelerated death benefit for terminal illness. This feature (provided at no cost under some plans) typically pays 50% of the death benefit when the insured’s life expectancy is 12 months or less. This accelerated benefit is provided only if the insured chooses to activate it. If activated, the remaining 50% is paid at death. Payout provisions at companies differ, so be sure to check the actual provision.

o Accelerated death benefit for chronic illness. This feature (again provided at no cost by some companies) accelerates 20%-80% of the current death benefit amount upon election by the insured. This amount will be paid to the insured in a lump sum, discounted for reduced life expectancy. Requirements for qualifying for this benefit can vary among insurers. (Under one plan, the insured must need assistance with 2 of 6 activities of daily living and be receiving care in a qualified inpatient home for 90 days; the remaining face amount will be paid at death. Other plans may differ, so it’s important to check the actual provision.)

o Living benefit liquidity feature. This feature is rare in the industry at this time. It waives surrender charges on unloaned account values if the insured experiences a specified event. Such events may include: entering a nursing home/hospital for a specified period; illness due to cancer, heart attack, stroke, etc.; becoming unemployed and receiving unemployment benefits for a specified period; becoming disabled and approved for Social Security Disability Income benefits; death of a spouse; or physical damage to primary residence at a specified amount.

Return of premium feature. This guarantees return of the SPL premium. Depending on contract, the return can occur from day one or after a certain period.

In sum, SPL insurance is a great way to help clients increase the amount of money they can leave to heirs or favorite charities. It is simple and effective–the customer makes a single premium payment, which locks in an income tax-free death benefit, while the living benefit features allow access to the money should the customer need it for expenses related to such events as chronic or terminal illness.

In addition, with tax-deferred growth and tax-free death benefits to heirs, SPL offers significant advantages over savings vehicles like annuities or CDs.