GROUP UNIVERSAL LIFE INSURANCE : The Death Benefit

The Death Benefit
The policyholder under an individual group universal life insurance policy typically has a choice of two death benefit options. Option A provides a level death benefit in the early policy years. As the cash value increases, the amount of pure insurance decreases so that the total amount paid to a beneficiary upon the insured's death remains constant. Without any provision to the contrary, the cash value would eventually approach the amount of the total death benefit. To prevent this from occurring, and also to keep the policy from failing to qualify as a life insurance policy under existing tax regulations, the amount of pure insurance does not decrease further once the cash value reaches a predetermined level. Thereafter, the total death benefit increases unless the cash value decreases. Figure 1 graphically demonstrates option A. Note that this and the following figure are for illustrative purposes only. The actual death benefit for a particular individual will vary by such factors as the amount of interest credited, premiums paid, loans, and withdrawals.


Figure 1: Universal Life Insurance—Death Benefit Option A

Under option B, the amount of pure insurance is constant, and the death benefit increases each period by the change in the policy cash value. This is shown graphically in Figure 2.


Figure 2: Universal Life Insurance—Death Benefit Option B

With group universal life insurance products, an employee usually has only one death benefit option available, and whether it is option A or option B depends on which one the employer has selected. In general, there seems to be a feeling that the availability of both options makes a plan more difficult to explain to employees and more costly to administer. Most employers select option B, which is more easily marketed to employees because the increasing total death benefit is a visible sign of any increase in their cash value, or "investment." As a result, several insurers now make only option B available with their group products.

Universal life insurance products give the insured the right to increase or decrease the death benefit from the level originally selected as circumstances change. For example, the policyholder might have initially selected a pure death benefit of $100,000 under option B. Because of the birth of a child, this amount might be increased to $150,000. Increases, but not decreases, typically require that the insured provide evidence of insurability.