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Life Insurance: Providing Security for Your Survivors

Single-Premium Life Insurance

These are policies in which you pay the entire premium the first year. Your initial deposit (premium), age, smoking, and health status will determine the size of the death benefit that exceeds your initial investment, so that it qualifies as a life insurance contract.

Like other cash-value life insurance policies, your cash accumulates tax-deferred. However, you cannot borrow your money as easily as you can with other cash-value policies. If you're under age 59½, earnings you withdraw are taxed as ordinary income and are subject to a 10% penalty tax, much like an IRA.

IMPORTANT NOTE: Single-premium insurance policies issued after June 20, 1988, as well as other policies that allow a fast cash build-up, are known as modified endowment contracts (MECs). If you own one of these policies or are considering buying one, be aware that there are special tax consequences. These include owing income tax on policy loans (up to the amount the policy has earned) and a 10% penalty on loans or withdrawals made before age 59½ in addition to the income tax).

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