Single Premium Life Insurance
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Hyers and Associates, Inc. is an independent life insurance agency representing numerous carriers. There may be several reasons you are considering a single premium paid-up policy. We can help you find the coverage that best suits your needs.
Learning About Single Premium Life Insurance
Single pay life policies are designed to fit a wide array of investment and planning needs. They can be used for 1035 tax-free exchanges, wealth transfer, funeral trusts, charitable giving and in some cases investment growth.
In most cases, these are paid-up whole life policies that will no longer require premium payments in future years. In other cases, they are funded through a few installments, but usually in a short amount of time. Universal life or term life policies can also be used, but they are not quite as common as a whole life policy.
Life Insurance 1035 Tax-Free Exchange Policy
This may be the most common type of single premium life insurance policy. Oftentimes, this strategy is used simply to protect the cash value in an older policy when the owner no longer wishes to pay premiums.
The owner can transfer their cash value on a tax-free basis to a new paid-up policy without creating a taxable event. The new policy will no longer require any premiums and will also create a known death benefit and cash surrender value that can grow over time.
In many cases, the death benefit created as a result of a 1035 exchange will be less at onset when compared to the policy from which it originated. However, this may be more advantageous to an owner who does not want to create a taxable event and no longer wishes to fund an existing universal or whole life policy.
A 1035 exchange is a also a means to protect the existing cash value of a life policy from the Medicaid spend-down process. Those who are in the process of qualifying for Veterans Aid and Attendance and/or Medicaid benefits will fund an Irrevocable Funeral Trust with cash and/or the cash value of an existing policy in order to protect their estate.
Life Insurance For Charitable Giving And Wealth Transfer
Single premium policies are a preferred method for transferring wealth to families and charitable organizations on a tax-free basis. Life policies are popular for the simple reason that all gains are tax-free upon inheritance. When part of an irrevocable life insurance trust, they can also reduce federal estate and state inheritance taxes.
As oppose to leaving a taxable annuity or low interest certificate of deposit to a loved one, a single premium policy will instantly create a tax-free death benefit to the named beneficiary. A $50,000 CD could be used to fund a paid-up policy with a $75-$100K death benefit. And the policy owner would still have access to their principal if needed.
Charities prefer life insurance policies as they are a known quantity and easily accessible upon passing. The leveraged principal almost always creates and transfers more wealth (through an increased death benefit) so the charity has more funds to do their good work. And the insured may be able to deduct their premium outlays.
Single Premium Life As An Alternative Investment
As oppose to a taxable bank CD or insurance annuity, paid-up life policies are gaining in popularity as a safe and conservative investment. They will grow based on the performance of certain chosen investments while also providing tax-free benefits to the beneficiaries.
Equity-indexed life insurance policies have become popular as they safely credit interest based on gains in market indexes life the S&P 500 without exposing the owner to downside market risk. Additionally, equity-indexed life policies typically offer more favorable caps, spreads and participation rates than their fixed-indexed annuity counterparts. This translates to better investment growth.
What Is A Modified Endowment Contract?
A Modified Endowment Contract (also referred to as a MEC) is a rapidly funded life insurance policy that offers a less favorable tax treatment than a traditionally funded policy. Almost all single premium policies will be treated as MECs.
In 1988, the tax laws were changed to discourage the use of life insurance as a short term savings vehicle. Under these new laws, withdrawals, partial surrenders, loans, or assignments taken from the gains of a life insurance policy that qualifies as a MEC will be taxed as income and can be subject to penalties.
Modified Endowment Contracts still offer a tax-free death benefit to the insured (this being their primary advantage over an annuity or other investment) but policy owners can no longer access their investment gains on a tax-free basis.
It is also important to note that if a non MEC (pre June 1988) policy undergoes what the I.R.S. considers a material change, then it can also qualify as a MEC. In other words, transferring an old policy to a new policy using a 1035 tax-free exchange may cause gains in the new policy to lose their favorable tax status. Once a policy is deemed to be a Modified Endowment contract, then it will always be treated as such.
Thus, it is important to discuss the tax status of any policy you are considering with your tax advisor. Your agent can also tell you whether your single premium policy or 1035 exchange will be subject to MEC taxation rules.
Request Quotes, Illustrations And Information
We are an independent life insurance agency and can help you compare policies from all available carriers. While we do not offer tax advice, we can help you select a single pay life policy that best fits your needs and goals.
Contact us today to learn more.