The volatile markets of the past few years have compelled many investors to alter their asset allocations and replace equity positions with Treasury bills or other safer, short-term investments.
If you are one of these individuals, here’s an idea that may prove more productive over time.
Use some of these funds to purchase the whole life, disability or long-term care insurance you’ve been contemplating. Or pay for any existing coverage with a single-premium approach that will enable you to avoid annual premium payments for as long as you own your insurance.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How does single-premium insurance work?
As its name implies, a single-premium program offers you the option of paying for your insurance with a single, up-front payment, as opposed to annual premiums. In the past, these programs were available only through some insurance providers and then only on new policy purchases. In other words, a single up-front payment could not be used to fund premium payments on an existing policy.
Today, however, there are single-premium programs available that enable you to pay future annual premiums on an existing or new policy by purchasing a single-premium immediate annuity (SPIA). An SPIA generates a guaranteed stream of annual income that begins within a short time after you purchase it (typically 12 months). With this approach, you achieve a number of benefits beyond the convenience of having your premium payments made on time every year.
- Cost effectiveness. The payment required to purchase an SPIA capable of funding future insurance premiums can be substantial. However, it can also be less than the cost you would incur by paying your annual premiums out of cash flow.
- Greater flexibility. With traditional single-premium programs, you are subject to a 10% IRS penalty on withdrawals from your policy’s cash value that exceed the total premiums you paid or loans taken under the age of 59½. With an SPIA-based approach, you can access cash value without penalty.
- Cash management opportunities. The income offered by SPIAs is subject to prevailing interest rates. In a higher rate environment, you have the opportunity to lock in an attractive rate and generate the income required to pay your annual insurance premiums with a smaller up-front commitment.
- More choices. You do not have to purchase your SPIA from the same provider that issues your insurance policy. Rather, you are free to choose the SPIA that offers the most flexible terms available.
How an SPIA works
Massachusetts Mutual Life Insurance Company (MassMutual) recently provided this example of how a single premium with an SPIA compares with simply paying insurance premiums on an annual basis:
Assumptions:
- You’re a 55-year-old male planning to retire at age 65.
- The whole life policy you’re thinking about acquiring requires premium payments of $20,000 annually for the next 10 years.
- You purchase an SPIA that will begin generating annual income payments of $20,000 in a year from now.
- The cost of your SPIA is $150,000. In addition, you pay the first year’s premium on your whole life policy ($20,000) for a total expenditure of $170,000.
Comparing your options
Without the SPIA:
- $20,000 annually for 10 years
- $200,000 total premiums paid
With the SPIA:
- $150,000 up-front payment
- $20,000 for first-year policy premium
- $170,000 total payments
- $30,000 savings
A few caveats
- The income generated by SPIAs is partially taxable. In the example above, it is estimated that $3,333 of each $20,000 annual annuity payment is taxable at the annuity owner’s individual tax rate.
- You may withdraw cash from your SPIA, if you need it. However, withdrawals will reduce the income payments made by the SPIA, and you will have to cover any shortfall in premium payments made to the insurance provider. In addition, the annuity provider may impose surrender charges.
- If the annuity owner passes away, his or her beneficiaries can elect to receive the remaining income payments or a lump sum payment.
Clearly, single-premium insurance programs can be complex, but they merit consideration, especially if you:
- Need insurance but have been putting off acquiring it.
- Are receiving a financial windfall or inheritance that can be used to fund your initial, up-front payment.
- Have significant dollars allocated to cash equivalents or other low-yielding investments in an effort to avoid stock market volatility.
Implementing an SPIA strategy can provide you with the flexibility to apply this approach to existing policies, as well as any new coverage you may be contemplating.
Related Content
- Four Ways Life Insurance Can Grow and Protect Your Wealth
- Life Insurance Really Can Be Affordable and Uncomplicated
- Are You Too Young for Life Insurance?
- What Is Indexed Universal Life Insurance and How Does It Work?
-
Stocks Can't Hold Meta, Microsoft Gains: Stock Market TodayThe main indexes all opened higher Thursday on impressive Big Tech earnings, but momentum faded into the close.
-
Retirement Health Care Costs Are On the Rise: What You Need to KnowA 65-year-old retiree will face significantly higher lifetime health care costs than they would have a year ago, even with Medicare. Here are the surprising totals.
-
You Don't Have to Be Wealthy to Need a Wealth ManagerNavigating complex financial decisions is hard on your own, no matter how much money you have. A wealth manager can provide comprehensive financial planning, investment management, risk management and more.
-
Despite Tariffs, These Investment Experts Are Bullish on European EquitiesEuropean equities were one of the better-performing investments during the first half of 2025. They could be a good long-term prospect for U.S. investors needing to diversify, according to these investment managers.
-
How Do You Know You Are Ready for a Gray Divorce? 15 Yes-or-No QuestionsAs more people 50 and older get divorced, many splits are initiated by women who want a new path. Answer these 15 questions to see if you might need to think about how you should move forward.
-
'Buy Now, Pay Later' for Everyday Spending? This Financial Pro Thinks It's Risky'Buy Now, Pay Later' apps can get you out of a jam when you need money quickly. But using them regularly for small purchases could create problems.
-
Five Things to Consider Before Rolling Your 401(k) into a Roth IRAConverting at least some of an old 401(k) to a Roth IRA can offer long-term tax benefits and retirement flexibility, especially if you anticipate being in a higher tax bracket later or wish to leave a tax-free legacy.
-
From Dream Apartment to Nightmare: When Your Landlord Evicts You Through No Fault of Your OwnThis is what I suggested a tenant do to get out of her lease after her landlord's inexperience and lack of action made her rental situation unsafe. It's a legal situation called 'constructive eviction.'
-
Six Steps to Being Empowered and On Track: An Expert Financial Guide for WomenWhile most female investors feel on track with their financial goals and empowered by managing their investments, many regret not starting sooner. Here's how you can get started and take control of your financial future.
-
Selling Your Business? This Powerful Insurance Option Unlocks Multigenerational WealthPrivate placement life insurance (PPLI) offers almost unbelievable investment flexibility, estate planning and tax advantages. And it's completely legit.
