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What is a “Single Premium Life” (SPL) policy?
It’s a life insurance policy designed to act partially like an annuity and partially like a long-term care (LTC) policy. Most life insurance policies are funded for two reasons: 1) death benefit or 2) cash accumulation. A SPL policy is funded partially for the death benefit, but it is also funded to provide significant “living” benefits (accelerated benefits for LTC expenses and if the client has a critical or terminal illnesses).
Benefits of a SPL policy
A good way to help you understand why you need to learn about these products is simply to list the benefits. The benefits below are not necessarily offered with every product.
1) Simplified issue—Some policies have full underwriting and some are simplified issued.
2) Long-term care benefits—This is a benefit built into almost all SPL policies and the main reason clients will use them.
Most clients do not like the idea of paying LTC insurance premiums (they see it as a waste of money since they may never use it (not to mention that it’s expensive)). Many clients will self-insure their LTC expenses by keeping money available in CDs or money market accounts (not a good use of the money since the returns are pathetic and taxable each year).
A SPL policy will have tax-free LTC benefits and if the client never uses those benefits, a nice death benefit will pass income tax free to the client’s heirs (much more money will pass vs. keeping money in CDs or money market accounts).
3) Avoiding Probate—Because the death benefit from a SPL policy is paid as a death benefit (which is not the case with CD or money market funds), the money will pass outside of the probate process. In some parts of the country, this can save the heirs up to 10% of the value of the asset.
4) Liquidity—When we think of funding a life insurance policy, we typically think of large surrender charges. There are SPWL policies out there that have what is called a Return of Premium (ROP) option to them. That means at anytime the client can surrender the product and receive their entire premium back.
5) Tax-Free Death Benefit—Unlike growth in an annuity that is income taxed at death and prior to passing the asset to the heirs, a SPL policy will pay an income tax free death benefit to the heirs. This alone can be a reason clients will use a SPL policy over annuities.
High early cash value—For those SPL policies that do not have the ROP option, some are designed to have high early cash value. These policies act like money market accounts in that they have a minimum guaranteed rate of return. So, policies with low surrender charges should in very short order (a few years) have as a cash surrender value (CSV) equaling 100% of the client’s premium (and then after that the account balance should increase).
Again, the market for this product is a senior who is scared about LTC expenses but does not want to pay for LTC coverage they may never need. As such, having a policy with a high CSV is needed in order to make the client comfortable (because the insured can access all of money paid in premiums shortly after funding).
6) Other living benefits—Besides a LTC benefit, some policies have other accelerated living benefits such as a terminal or critical illness rider. These riders allow the insured to access a significant portion of their death benefit while living (vs. having to die in order for a life insurance policy to benefit the insured).
Examples—I wanted to compare the ROP product that has been on the market for some time with one that is a bit newer and not as well known.
Assume the client is a 65-year old female who is receiving SS benefits and who has $100,000 sitting in CDs. She does not want an annuity because of the surrender charges and is very worried about LTC expenses.
What’s the difference in the two policies?
-The ROP is nice, but if the client activates the ROP, they no longer have the policy and the return on the money is non-existent.
-The ROP is simplified issue (the NON-ROP is not).
-The ROP product is an expense reimbursement product (meaning the client has to pay for the expenses and then is reimbursed for “actual” expenses). With the NON-ROP product, once the insured can’t perform 2 of 6 ADLs, it simply pays the client regardless of expenses incurred.
-The NON-ROP product is designed more for death benefit planning and for clients who want access to the death benefit prior to dying (if they have a critical or terminal illness).
-The NON-ROP product is a much better savings account (the CSV equals the premiums paid in year three (projected) and guaranteed to equal them in year five).
-The guaranteed CSV of the NON-ROP product is $140,000 (the projected value is $229,011) at age 85 as compared to $101,647 with the ROP product (which is also the projected value).
If you are providing financial planning, insurance, or estate planning advice to clients, you MUST know about this product. How many clients are out there who have $50-$100K+ sitting in CDs, bank, or money market accounts? Millions. How many of those clients would rather:
-obtain LTC benefits (and with the NON-ROP product an accelerated DB for critical and terminal illnesses).
-pass significantly more wealth to the heirs upon death
I think many of them would if they knew the product existed.
Because of the high cash value or ROP (depending on the product used), the client can feel comfortable knowing that if cash is needed in a pinch, it will be available and if not, they and/or their heirs will receive significantly more benefits than leaving money sitting around in a CD or money market account.