Managing The Death Benefit - Part 1

We have been talking about the premium associated with a universal life policy. You also have the ability to manage the amount at risk-the life insurance.

You will be asked whether you want death benefit option A (sometimes referred to as option 1) or option B (or option 2). Option A is the conventional, whole life design, whereby the death benefit stays equal to the face amount you select when you purchase the policy (say, $100,000), in spite of the fact that the account within the policy grows. Therefore, if you die and the insurance company pays off the $100,000 required, that $100,000 would be partially your own account value money and partially insurance company money, Le., life insurance.

In effect, in an option A policy, every time you put money into the policy, or the account value grows as a result of interest earnings, the amount of life insurance is decreased. Alternatively, you could request option B (option 2), making the amount at risk a constant. That is, the insurance company promises to pay your beneficiary $100,000 of insurance company money (life insurance), in addition to the amount of money in your policy owner account.

In most cases, when applying for one of these policies, you will want to keep the life insurance company at risk for the maximum amount, so that you will want to choose option B (option 2). In the future, when you are more concerned about expenses in the policy than in the death benefit, it would be logical to switch from option B (2) to option A (1). This would result in the total death benefit being leveled to the benefit in force at the time of the change. Thereafter, further increases in the account value would diminish the insurance company's amount at risk and thereby reduce mortality charges within the policy.