How Does Prepaid Life Insurance Work?

Prepaid Life Insurance


If you have ever heard the name of prepaid life insurance, a question may arise in your mind: how does it work? Well, before exploring the working plan, let’s take a brief idea of what prepaid life insurance actually is.

In general, prepaid life insurance is known as single premium life insurance (SPLI), a type of permanent life insurance. In this insurance, you will have to pay the total amount or premiums upfront or in monthly instalments (in some cases) before enjoying the service.

Now let’s explore: How does prepaid life insurance work? Typically, the lump sum you paid into the policy at once will be returned as a death benefit with cash value after the stipulated period.

For in-depth details about prepaid life insurance, keep reading the entire context.

Understanding Prepaid Life Insurance

Prepaid Life Insurance Work
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Prepaid life insurance is completely different from traditional and whole life insurance. This is because these life insurances require paying premiums on a monthly or annual basis, while prepaid life insurance does not.

This insurance policy requires insureds or policyholders to pay the full premiums prepaid only or in monthly instalments (in some cases). For example, a term life insurance policy may have premiums of $500 annually for the entire length of the policy.

In contrast, with prepaid life insurance, only one premium or monthly instalment (aged below 89) has to be paid for the policy. And there would be no additional payments for the rest of the policy term.

Typically, the death benefits of a prepaid life insurance policy will rely on the amount you paid the first time and the cash value rate your insurance company offers.

How Does Prepaid Life Insurance Work?

Life Insurance Work
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Prepaid life insurance requires a single payment or monthly instalment as premiums from insureds or placeholders to purchase this policy. And your selected beneficiary will get full coverage of your policy after your death.

Typically, the size of the death benefits depends on your payment premiums, your health condition, and the age of your application. Additionally, the cash value facility of the prepaid life insurance adds tax-deferred interest on your coverage at a rate set by your chosen insurance company.

However, with prepaid life insurance, you don’t have to worry about inflation which can affect your coverage. Your beneficiary will get the exact coverage depending on the type of prepaid insurance you signed for.

Prepaid life insurance is quite similar to the term life insurance in the lifetime. For example, you can purchase a prepaid life insurance policy that covers you for 5-10 years. The policy will expire automatically if you don’t die within 5-10 years.

In that case, you have to renew the policy, which may require you to pay more, depending on your insurance company. But if you die within the stipulated duration, your beneficiary will get the full death benefit of your policy.

Why Should You Purchase Prepaid Life Insurance?

For those who can pay the entire premium for a policy at a time, prepaid life insurance can be a good choice. This insurance comes with a large number of benefits for the insureds. Some of the significant benefits of purchasing prepaid life insurance have been demonstrated below.

Single Premium Payment

While most life insurance requires paying premiums monthly or annually, prepaid life insurance requires a single premium payment or monthly instalments (in some cases). Depending on the type of prepaid life insurance you purchased, you have to pay a lump sum for your policy.

In that case, your chosen insurance company will decide when you have to pay the premium. Once you pay the premium, you won’t have to worry or hassle about paying monthly or annual premiums.

Outstanding Death Benefits

For seniors with good health conditions, prepaid life insurance will be a good choice for them to ensure an impressive death benefit for their beneficiaries. The benefits will be enough to cover funeral and burial expenses.

Even the received coverage can be used to pay the death insured’s left debts, including house loans, car loans, or any other personal loans.

Ideal For Seniors

Unlike any other life insurance, prepaid life insurance won’t last for a long time. But, if you are a senior and likely to live another ten years, prepaid life insurance is for you.

This is because you can choose your prepaid life insurance plan according to your age so that you don’t have to renew the policy. You will just have to ensure you might die within the coverage period.

Renewable Life Insurance

You can also renew your prepaid life insurance if you want. Prepaid life insurance policies usually last around 5 to 10 years. So, your policy will expire if you don’t die within the stipulated duration of your policy.

In that case, you will have to renew the policy for an extended time. If you die within the coverage period, your registered beneficiary will receive the death benefits.

Everyone Can Purchase Prepaid Life Insurance

Besides seniors, all ages individuals can purchase prepaid life insurance. Even if you have poor health conditions, you can buy this insurance. All you need to do is pay the full premium instead of the monthly or annual payment.

However, if you purchase the policy at an early age, you will need to renew it if the policy period expires. In that case, the insurer may charge for the policy renewal, which actually depends on your chosen insurance company.

Prepaid Life Insurance Is Ideal For Whom?

Prepaid Life Insuranc
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Prepaid life insurance is typically not ideal for everyone. In general, this insurance is ideal for individuals who have got a lump sum of money as a gift, inheritance, etc.

Besides, if anyone invests a lot of money in different financial goals and doesn’t want to invest more, he/she should consider purchasing prepaid life insurance. In that case, the insured doesn’t have to hassle paying monthly and annual premium payments. Purchasing prepaid life insurance will work as a one-time investment.

Additionally, prepaid life insurance is ideal for business owners, freelancers, self-employed professionals, etc., especially those doing well in income, but there is no guarantee in the future. So, if your future is unsure but now you can afford a life insurance policy, you should consider prepaid life insurance.

However, prepaid life insurance is not ideal for those who get a fixed salary for a certain period. In that case, traditional life insurance will be the best choice, which requires paying premiums monthly or annually.

What Are The Drawbacks Of Prepaid Life Insurance?

Drawbacks Of Prepaid Life Insurance
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Apart from outstanding benefits, Prepaid life insurance comes with some disadvantages. Here we have talked about some such drawbacks of this insurance so that you can decide whether prepaid life insurance is good for you.

  • Seniors up to 89 years old can’t pay the premium through monthly instalments in prepaid life insurance.
  • Prepaid life insurance is considered a limited endowment contract, which can get tax penalties, especially when withdrawing or taking a loan from the policy cash value.
  • You can’t add additional money to your prepaid life insurance policy later.

Some Commonly Asked Questions About Prepaid Life Insurance

People are always confused about purchasing prepaid life insurance, which raises different questions in their minds. That’s why here we have illustrated some questions commonly asked by people worldwide about prepaid life insurance. Go through this section; you might get these answers useful.

1.    What Happens If I Don’t Die Before Expiring My Stipulated Duration On Prepaid Life Insurance Policy?

If you don’t die within the stipulated period of your policy, you will receive a refund of your paid premiums. In that case, your received coverage doesn’t contain interest, and the insurer may subtract the administrative and other charges from the coverage.

2.    Is Prepaid Life Insurance Taxable?

If you withdraw money from the policy cash value, you will need to pay taxes of around 10% for the withdrawals. And you can only do that before age 59.5. However, there won’t need to pay any tax for the lump sum payout.

3.    Where Will I Get Prepaid Life Insurance?

Typically, insurance companies that sell different burial policies offer prepaid life insurance. Although most insurance companies don’t highlight the prepaid insurance policy on their website, you will get the information by consulting with them directly. So, it is better to consult insurance companies nearby while purchasing prepaid life insurance.

Read More: How Do I Know How Much Insurance to Buy?


Hopefully, you might have understood: How does prepaid life insurance work after reading the overall discussion? Typically, prepaid life insurance is a kind of single premium payment life insurance where you have to pay the full premium once for the policy.

In some cases, you can pay the premiums in monthly periods during a certain year. Once you pay the full premium, your coverage will grow with the cash value. In that case, you can withdraw the cash value against your coverage if you want.

On the other hand, if you die within the stipulated period, the death benefit will be provided to your registered beneficiary. And the death benefit will be enough to bear funeral, burial, debts, and family care expenses.