I sometimes have clients who are looking to pay all the premiums of a cash-value type policy (whole life, universal life, etc.) up front in a single lump-sum premium.  While I don’t always agree with this strategy, in some cases, I don’t believe it’s a bad idea.

One of the benefits of a cash-value policy is the favorable tax treatment given to cash withdrawals and policy loans.  In many cases, one can access the cash portion of the policy on a tax-free basis (please ask your tax professional for the specific details).  However, if the premium is paid too quickly (as in one lump sum), these advantages disappear.

Changes to the Tax Laws in 1988 resulted in insurance policies that were funded too quickly (generally one lump-sum payment) being classified as modified endowment contracts (MECs), eliminating any of the tax advantages of a cash-value policy.

I have recently recommend a few clients to purchase universal life insurance policies with Lapse Protection (or secondary guarantee) with a single premium.  As we typically don’t recommend this type of policy for cash-value growth, turning this policy into a modified endowment contract will not have a negative effect on the client.  There is one positive effect, however.  As one can lose the lapse protection if the premiums aren’t paid on time, paying with a single premium will essentially guarantee that the lapse protection will stay in force, as will the guaranteed death benefit of the policy.

If  you are looking into one of these policies, find out how much the single premium would be.  It might just make sense for you.

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