The Death Benefit Under Universal Life Option B

Most people opt for universal life insurance for the death benefit.

There are many people who aim to create a financial legacy for their children by getting themselves insured, because upon their death their spouse or children get a death benefit, if the premiums were all paid on time.

Let’s dive into the details.

What is Universal Life Insurance?

Universal life insurance is a type of insurance that gives a permanent protection plan to the policyholder. Along with having an adjustable death benefit, policyholders also have a cash value in this plan.

One major feature of universal life insurance is that it is flexible compared to whole life insurance: adjustable premiums and death benefit. Flexible premiums mean that excess premium amounts can be added to the cash value, so you can skip paying premiums in the future without having to worry about the policy lapsing.

Universal life insurance Pros and cons

Universal life insurance is a type of permanent life insurance that offers flexibility regarding premium payments, death benefits, and cash value accumulation. Like any financial product, universal life insurance has its pros and cons that you should consider before deciding.

Pros

• Flexibility in premium payments: Universal life insurance allows you to adjust your premium payments based on your changing financial situation. You can pay more or less than the required premium or even skip payments altogether as long as you have enough cash to cover insurance costs.
• Potential for cash value accumulation: Part of your premium payments goes towards building cash value that grows tax-deferred. You can use the cash value to supplement your retirement income, pay for college expenses, or cover unexpected financial emergencies.
• Customizable death benefit: You can choose the amount of death benefit you want and the length of coverage. If your needs change, you can increase or decrease the death benefit amount.
• Ability to access cash value: You can borrow or withdraw money from your policy’s cash value, usually tax-free, to meet your financial needs.

Cons

• High premiums: Universal life insurance tends to have higher premiums than other types of life insurance, especially in the early years. The costs of insurance and cash value accumulation can eat up a significant portion of your premium payments.
• Risk of lapse: If you don’t pay enough premiums or the cash value is not enough to cover insurance costs, your policy may lapse, and you may lose coverage.
• Fluctuating interest rates: The interest rate credited to your policy’s cash value may fluctuate over time, depending on market conditions. If the interest rate drops too low, it may not be enough to keep your policy in force.
• Complexity: Universal life insurance can be complex and challenging to understand, especially with all the available options and features. You may need the help of a financial professional to make the right decisions for your situation.

Pros and cons of decreasing a universal life policy’s death benefit

Pros

• Lower premiums: Decreasing the death benefit can reduce your premium payments, which can be helpful if your financial situation changes or you need to cut costs.
• Customizable Coverage: You can adjust the death benefit amount to fit your changing needs. For example, if your children are grown and no longer depend on you financially, you may not need as much coverage as you did before.

Cons

• Lower death benefit: Decreasing the death benefit means your beneficiaries will receive a smaller payout if you pass away. This may not be enough to cover their financial needs.
• Potential tax consequences: If you borrow or withdraw money from your policy’s cash value and decrease the death benefit, you may trigger a taxable event. You may also have to pay surrender charges if you cancel the policy.

Pros and cons of increasing a Universal Life Policy’s death benefit

Pros

• More comprehensive coverage: Increasing the death benefit can provide more comprehensive coverage for your loved ones. This can be particularly helpful if your financial situation has improved or if you have new dependents that you want to provide for.
• Potential tax benefits: Your beneficiaries may receive the death benefit payout tax-free, which can help minimize the financial burden on your loved ones.

Cons

• Higher premiums: Increasing the death benefit usually means higher premium payments, which can strain your budget. You’ll need to ensure you can afford the increased payments in the long run.
• Age and health factors: The insurance cost typically increases as you age. If you’re in poor health or have a pre-existing medical condition, you may face higher premiums or even be denied coverage.
• Requalifying for coverage: If you increase your death benefit significantly, you may need to request coverage, which could involve submitting to a new medical exam or providing updated health information. Depending on your health status, this could result in higher premiums or being denied coverage altogether.
• Reduced cash value: Increasing the death benefit can reduce the amount of money that goes towards cash value accumulation, which can impact your ability to use your policy for future financial needs.

The Death Benefit

Of course, the death benefit is only granted to beneficiaries upon the death of the policyholder, but the cash value component can be used by them during their life too.

What is interesting is that universal life insurance has two options for death benefits, option A and option B- level death benefit and increasing death benefit. The policyholder then chooses whichever option works best for them.

Option A

Most commonly known as the level death benefit option in a universal life insurance policy, this is the type where the policy proceeds are the same throughout and are always equal to the death benefit. Here, the cash value is part of the death benefit, and upon the death of the policyholder, beneficiaries will receive the death benefit and the accumulated cash value.

Option B

Option B of the death benefit of universal life insurance is also referred to as increasing death benefit. The insurance protection amount remains the same, of course, but the added cash value is basically the increase in the value of the death benefit.

If your death benefit is smaller, your best bet is opting for option B because since there is a potential to make excess premium payments, your cash value grows at a commendable rate. Obviously, the cash value growth depends on the number of premiums paid each month.

In short, high initial premiums and low initial death benefits lead to faster growth of the cash value component. So the excess amount of premiums paid grows interest-free within the cash value.

Option B Death Benefit Explained

As we know that Option B in Universal Health Insurance provides an increasing death benefit that’s equal to the policy’s apparent worth. Let’s look at it further to understand how its works.

• Universal Life Option B provides an increasing death benefit based on accumulated cash value.
• The insured amount remains unchanged, while the death benefit increases with the accumulated cash value.
• Premiums paid over time are allocated to the policy’s cash value, which earns interest or investment returns.
• The cash value can accumulate over time, resulting in a higher death benefit payout.
• When the policyholder dies, the beneficiaries receive the original policy amount and accumulated cash value as a tax-free death benefit payout.
• The increasing death benefit under Option B can provide a financial advantage to beneficiaries.
• Premiums for Option B are generally higher than Option A’s, which offers a level death benefit.
• Policyholders should carefully consider their options and financial goals before choosing the type of coverage that best suits their needs.

So we’ve got a slight overview of what a death benefit in option B looks like. Let’s explain it further by using real-time examples with figures.

Greg purchases a universal life insurance policy of $500,000. Given a choice between options A and B, he chooses option B. Now over time, he pays higher premiums accumulated into the cash value. Now his savings component has rounded up to $100,000.

When Greg dies, his beneficiaries will get a total of $600,000 as the death benefit, and that too tax-free!

This is a major advantage of an increasing death benefit of universal life insurance; more cash value is grown over the years your beneficiaries inherit.

One major disadvantage

In all of the pros of selecting option B, one major disadvantage is that if the policyholder dies early during the contract, beneficiaries will receive very less death benefit because of the initial low amount set.

The cash value requires a couple of years to mature, and with time the primary advantage of option B comes into force. However, in the unfortunate scenario that the policyholder dies during the early stages, the death payout will be significantly low as compared to if he had chosen option A.

Potential buyer

A person who may have expected expenses in a few years like sending their kids off to college or paying for their child’s wedding, this type of death benefit option works best for such people.

This works out best for such a family because higher premiums are affordable when children are young; lower expenses, lower school fees, and all of these determinants can be reasons for a family being able to afford higher premiums during early stages.

Of course, a portion of the cash value can be utilized during the lifetime of the policyholder, but the remaining can also be added to the death benefit granted to beneficiaries when the insured dies.

The Switch Option

What happens if you choose death benefit option B and later find it unsuitable? Perhaps the premiums have spiked, becoming unaffordable, or the major expense you anticipated no longer exists.

Conversely, what if circumstances change and you find option A limiting? Maybe you realize a higher death benefit would better support your beneficiaries financially.

Many policies accommodate these changes, allowing policyholders to switch options without incurring extra fees.

When you switch from option A to B, not only does the death benefit increase, but so does the net amount at risk, adjusted by the current cash value.

Is Option B Better?

In some cases, yes.

If you want the cash value account to grow over time for an added death benefit, then yes, this type of death benefit option will work out best for you. It is also important to note that if there is an increase in death benefit at the end, it comes at the cost of paying high premiums too.

If you can afford to pay higher premiums throughout to keep growing your value at the end, go for it! A universal life policy comes with the option of flexibility that says that if you pay premiums upfront, you can skip further payments.

Since your beneficiaries get the whole death benefit PLUS any additional accumulation, and that too tax-free, choosing the death benefit under universal life option B is your safest bet!

What are the types of Universal life insurance?

There are several types of universal life insurance, each with unique benefits. Here are some of the most common types of Universal life insurance and their features.

Guaranteed Universal Life (GUL)

With a GUL policy, the premiums and death benefits remain fixed for the policy’s life. This type of policy is often used for estate planning or final expense coverage. GUL policies can be a good option for those who want to ensure their beneficiaries receive a set amount of money, regardless of market fluctuations or interest rate changes.

Indexed Universal Life (IUL)

An IUL policy offers the potential for higher returns based on the performance of a market index, such as the S&P 500. IUL policies typically have a floor, or minimum interest rate, and a cap, or maximum interest rate, which can limit potential gains and protect against market losses. This type of policy can be a good option for those who want to earn higher returns than traditional universal life insurance policies.

Variable Universal Life (VUL)

A VUL policy allows the policyholder to invest in separate accounts, similar to mutual funds, that can provide the potential for higher returns. The death benefit and cash value can fluctuate based on the performance of the separate accounts. This type of policy can be a good option for those who are comfortable with investment risk and want the potential for higher returns.

Equity Indexed Universal Life (EIUL)

EIUL policies combine the features of IUL and VUL policies, offering the potential for market-linked gains and investment flexibility. These policies often have a minimum interest rate guarantee and a cap on potential profits. EIUL policies can be a good option for those who want to participate in market gains while also having some protection against market losses.

Each type of universal life insurance works differently and offers its own unique benefits. It’s important to consider your goals and financial situation carefully before choosing the type of policy that’s right for you. A financial advisor can help you navigate the options and choose the policy that best suits your needs.

FAQs

What is Universal Life Insurance?

Universal Life Insurance is a type of permanent life insurance that provides lifelong coverage and also allows policyholders to accumulate cash value over time.

How does Option A differ from Option B in Universal Life Insurance?

Option B provides an increasing death benefit based on cash value accumulation, while Option A offers a level death benefit throughout the policy’s life.

What are the benefits of Universal Life Insurance with an increasing death benefit?

An increasing death benefit provides additional protection for policyholders and their beneficiaries, as the death benefit can increase over time based on cash value accumulation. Additionally, the policyholder can access the cash value for various financial needs.

How is the death benefit paid out under Universal Life Option B?

The beneficiaries receive a tax-free payout upon the policyholder’s death, including the original death benefit and any accumulated cash value.

What factors should I consider when choosing between Option A and Option B?

When choosing between Option A and Option B, consider your financial goals, budget, and the amount of coverage needed. It may be helpful to consult with a financial advisor or insurance broker to determine which option is best for you.

Conclusion

Universal Life Option B offers policyholders and their beneficiaries a significant financial advantage by allowing the cash value to accumulate over time, thereby increasing the death benefit. This option not only delivers a tax-free payout upon the policyholder’s demise but may also provide a greater financial edge compared to Option A, which has a static death benefit level.

Choosing the right life insurance policy requires a careful assessment of your financial needs and goals. Opting for Universal Life Option B can ensure financial security and peace of mind for policyholders and their families, despite its potentially higher premiums.