Managing The Death Benefit - Part 2

You may come to a point where you want to decrease the mortality charges even more. In that case, you may request that the insurance company reduce the death benefit on your policy to the minimum amount possible. Do this with caution if you request such a reduction in the early years, because you may have to pay a partial surrender charge, or it might cause a force-out of money from within the policy which is likely to create an income tax liability.

The insurance company will limit any death benefit reductions that would disqualify the policy as a life insurance policy under Internal Revenue Code Section 7702. With the minimum face amount, the minimum amount of investment return from the account value will be used to pay mortality charges, but the policy will remain a life insurance policy. Earnings will remain sheltered from income taxes, and the policy will serve primarily as an investment vehicle.

Very often we find the reverse scenario when working with young policy owners. A young couple gets married; both parties are working and are relatively independent of each other economically. They buy a universal life policy with a minimum face amount and adjust their premium payments to reach the desired funding level. At some future date, children come along, and one spouse becomes more economically dependent upon the other. In this case, the young married may ask that the policy death benefit be increased. In many cases, this is far less expensive than applying for and starting a new insurance policy to increase coverage. In fact, if they had maximized the premium payment while both were working, they might now decrease their cash-flow into the contract while increasing the amount at risk.