Death Benefit Options

Universal life policies typically offer multiple death benefit options. Understanding these options is important for the exam and for helping clients choose the right structure.

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Overview of Death Benefit Options

Most UL policies offer two or three death benefit options:

The choice of option affects both the death benefit and how quickly cash value accumulates.

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Option A: Level Death Benefit

Option A (also called Option 1 or Level Death Benefit Option) provides a level death benefit equal to the face amount.

How It Works

Visual Representation

Death Benefit: ━━━━━━━━━━━━━━━━━━━━━ $500,000 (level)
                ████████████████████
Cash Value:     ░░░░░░░▓▓▓▓▓▓▓▓▓▓▓▓▓ (grows over time)
Net at Risk:    ██████████████░░░░░░ (decreases)

Key Points

• Beneficiary receives the face amount only (cash value is not added)
• As cash value grows, it becomes part of the death benefit
• Net amount at risk decreases as cash value increases
• Lower COI charges as cash value grows (smaller net amount at risk)
• Cash value grows faster than Option B (lower COI costs)

Example

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Option B: Increasing Death Benefit

Option B (also called Option 2 or Increasing Death Benefit Option) provides a death benefit equal to the face amount PLUS the cash value.

How It Works

Visual Representation

Death Benefit: ━━━━━━━━━━━━━━━━━━━━━ $500,000 (face amount)
               ░░░░░░░▓▓▓▓▓▓▓▓▓▓▓▓▓ + Cash Value (increasing)
               ════════════════════════════════
Total:         Increasing over time

Net at Risk:   ████████████████████ $500,000 (constant)

Key Points

• Beneficiary receives face amount PLUS cash value
• Death benefit increases as cash value grows
• Net amount at risk stays constant (always equals face amount)
• Higher COI charges (net amount at risk doesn't decrease)
• Cash value grows slower than Option A (higher COI costs)

Example

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Option C: Return of Premium

Option C (offered by some insurers) provides a death benefit equal to the face amount plus cumulative premiums paid.

How It Works

Example

Considerations

• Less common than Options A and B
• Appeals to those who don't want to "lose" premium payments
• Higher cost than Option A
• May or may not be more than Option B depending on cash value

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Comparing Death Benefit Options

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Switching Between Options

Many UL policies allow policyholders to switch between death benefit options:

Switching from Option A to Option B

Switching from Option B to Option A

Exam Tip: Switching from Option A to B may require evidence of insurability because the death benefit is increasing. Switching from B to A typically does not.

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How to Choose

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Key Takeaways

• Option A (Level): Death benefit equals face amount; cash value is included within it
• Option B (Increasing): Death benefit equals face amount PLUS cash value
• Option C (Return of Premium): Death benefit equals face amount plus premiums paid
• Option A has lower COI and faster cash value growth
• Option B provides higher death benefit but slower cash value growth
• Switching from A to B may require evidence of insurability
• Switching from B to A generally does not require underwriting
• The best option depends on whether the priority is cash value or death benefit