The Death Benefit in a Variable Universal Life Policy

Is it a good idea to get a variable universal life policy only for the death benefit?

Most people are only looking for a death benefit when shopping for life insurance. And it’s not wrong. A death benefit can help you with several things. It’s definitely worth the effort of finding different policies and comparing it to see which one suits your needs best.

But what is the role of the death benefit in a Variable Universal Life Policy?

A death benefit is essentially a payout to a beneficiary upon the insured’s death. It’s not subjected to income tax and is basically a lump sum payment for the family of the deceased.

In simple words, a death benefit is supposed to replace your income after you die. And the beneficiary has no restriction on how they use that money. However, it is usually used to cover funeral costs.

But keeping that concept in mind, it is pretty evident that the death benefit needs to be a good enough amount to pay off funeral and burial expenses and leave some for your family to get by and pay their bills. So in that sense, no small payout would suffice.

However, the death benefits offered as part of insurance policies are all different. They all have different payouts and are used for various other reasons. One of these policies we’ll explore is the death benefit in a variable universal life policy.

What exactly is a Variable Universal Life Policy?

A Variable Universal Life Insurance is a type of permanent life insurance with a flexible premium and a built-in savings account for cash accumulation. It typically has a maximum cap and minimum floor on the investment return you could get from the cash value.

So what this means is, if you have limitations on the amount you could pay as premiums and you are looking to get a permanent life insurance policy that has an investment component too so you could accumulate a good amount of money which could be cashed out on a rainy day, this policy is for you.

A variable universal life insurance policy is much like traditional insurances. Except for the sub-accounts that invest your cash value in the market. Kind of like a mutual fund. Fluctuations in the market can lead to significant profits. But also, significant losses. This is where the savings part of the policy comes in.

Then the savings account is combined with a separate death benefit. So as far as we know till now, you’re getting quite a lot out of this insurance policy. But is that really true? Let’s look at all the pros of a variable universal life policy.

Pros of a Variable Universal Life Policy:

  • The death benefit would not decrease unless you stop paying your premiums.
  • The premium payment options are flexible.
  • You can earn higher with your cash value investments compared to other insurance policies.
  • You can decide how your cash is used, giving you a sense of control over your account.
  • You can control your individual risk tolerance much better.

Cons of a Variable Universal Life Policy:

  • While you would experience a high return on your investment, it could also lead to high losses.
  • Fees with a variable universal life insurance may be higher than with other life insurance policies.
  • It’s a more complex life insurance policy and needs close monitoring throughout the life of the policy.
  • It might have surrender charges for typically up to 15 years. Or at least at the starting of your policy.

So while, the pros do outweigh the cons, our concern here is how the death benefit in a variable universal life policy pays off.

Since with a variable universal life policy, you get the added advantage of a savings account along with cash accumulation, it’s a good investment. But in terms of getting a death benefit, you don’t have anything to worry about either. Your death benefit will remain the same throughout the entirety of your insurance as long as you pay your premiums.

However, since this is a complicated insurance policy with a lot of unforeseeable variants like the market value and the anticipation of profit or loss, the insurance needs a few changes here and there throughout the life of the policy. But even with the uncertainty, you can decrease or increase your death benefit and your coverage however you please. Thus, you will get the traditional life insurance, a good death benefit and a cash accumulation in a savings account that can keep increasing if the market isn’t fluctuating, all in one insurance policy.

With the death benefit, you can ensure your family doesn’t have to deal with the financial burden of your death, along with the emotional one. So the death benefit in a variable universal life policy can only act as an added positive point for the insurance policy.

But if a good coverage death benefit is what you’re looking for, then a variable universal life insurance policy isn’t the only insurance policy you could get it from. If you don’t want the uncertainty of the market rate or have restrictions with any part of the policy whatsoever, but still want a good amount of death benefit, you might want to explore other options such as:

1.  Final Expense Insurance

A final expense insurance aims to provide affordable coverage to people who are solely looking for a death benefit policy. The premiums are affordable since the target audience for this policy are retired individuals above the age of 65 who are looking to get some sort of insurance that will take care of their funeral expenses after they leave. And if possible, pay some of the bills for their family. The affordable premiums are designed specifically for these individuals since they would only have their pension to pay these and pensions aren’t exactly buckets of money.

The only drawback with this policy is that it’s small scale. So the premiums are small, the coverage is small and the death benefit is small unlike the death benefit in a variable universal life policy. It would be sufficient to cover your funeral costs but not much else. If this is the kind of death benefit that you would be okay with, then you might want to look into final expense insurance.

2.  Guaranteed Issue Life Insurance

A guaranteed issue life insurance is a type of whole life insurance in which you are not required to answer any health questions, undergo a medical exam or provide your medical or prescription history to the insurance company. It’s essentially for people with poor health who cannot otherwise find life insurance.

It offers a death benefit along with a cash accumulation that you can borrow against whenever you want. The death benefit is the same as the death benefit in a variable universal life policy.

The specifications of other whole life insurance policies are pretty much the same when it comes to death benefits.

3.  Term Life Insurance

Term life insurance is a simple life insurance that ends after a specific period of time the policy is for. However, if a person died during that period then the death benefits are paid to the named beneficiary. But if the insured was to die after the end of the policy, they would not be entitled to any sort of payout. It’s usually a good idea for people who want a simple policy without any cash accumulation or savings component attached to it.

So if you’re looking to get a death benefit only, this policy has a sort of risk attached to it. We never know when the time would come. What if you outlived your policy term? You would not get any death benefits no matter how many premiums you had paid. You could always renew your policy but that would be a separate hassle. This is why term life insurance is never a good idea for people who are looking to get death benefits solely.

4.  Universal Life Insurance

Universal life insurance has the same specifications as a variable universal life insurance. The only difference is that there is a fixed interest rate on the savings earned by the insured. Whereas in variable universal life policy, the insurer offers a pool of investors for the sub-accounts. The death benefit in a variable universal life policy and a universal life policy are the same.

So is the death benefit in a Variable Universal Life policy a good idea?

For you to get good coverage death benefits, your best bet is to either go for a permanent insurance type like variable universal or universal life policy or a whole life insurance type like guaranteed issue life insurance. These are designed to give you a payout on your death, unlike a term life insurance policy. If you are on a budget and your main aim is to pay off funeral costs, I would suggest a final expense insurance. But all in all, the death benefit in a variable universal life policy depends on performance of the policy and seems the most rewarding with the number of other perks it seems to offer.

Nabeel Ahmad

Nabeel Ahmad

Nabeel Ahmad is the founder and editor-in-chief of Insurance Noon. Apart from Insurance Noon, he is a serial entrepreneur, and has founded multiple successful companies in different industries.

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