Guides
Universal life death benefit options A and B
Option A pays a level death benefit; option B pays the face amount plus the account value. How each affects cost, cash value and what your family receives.
Universal life policies usually offer two death benefit options. Under option A, the death benefit is level: your beneficiary receives the face amount, and growth in the account value reduces the insurer's risk instead of adding to the payout. Under option B, the death benefit is the face amount plus the account value, so it rises as the account grows. Option B costs more each month; option A usually lets cash value build faster.
Option A: the level death benefit
With a level death benefit, the total payout stays at the face amount you chose, for example $500,000. The account value is part of that $500,000, not on top of it. As the account grows, the insurer's exposure, the net amount at risk, shrinks. Because the monthly cost of insurance charge is calculated on that amount at risk, the charge tends to be lower than under option B, and more of each premium can stay in the account.
Say the face amount is $500,000 and the account value is $100,000. The insurer's amount at risk is $400,000. If the account grows to $300,000, the amount at risk falls to $200,000, and the insurance charge falls with it, other things equal. The death benefit paid is still $500,000.
Option B: the increasing death benefit
With an increasing death benefit, the payout is the face amount plus the account value. With the same $500,000 face amount and a $100,000 account value, the death benefit is $600,000. The net amount at risk stays near $500,000 however large the account becomes, so the cost of insurance does not shrink as the account grows. The monthly charge, and with it the premium needed to keep the policy going, is higher.
Option B suits someone who wants the family to receive both the insurance and the savings, for example because the account is meant to be inherited rather than used in retirement. The cost is lower cash value growth, since more of each premium pays for insurance.
Side by side
| Feature | Option A (level) | Option B (increasing) |
|---|---|---|
| Death benefit paid | Face amount | Face amount plus account value |
| Net amount at risk | Falls as account grows | Stays near the face amount |
| Monthly insurance charge | Generally lower over time | Generally higher |
| Cash value growth | Usually faster | Usually slower |
| Best fit | Lower cost, accumulation | Larger payout that grows with the account |
Option C and other variations
Some carriers offer a third choice, often called option C, that pays the face amount plus the total premiums paid, sometimes with a cap. It acts like a return-of-premium feature. Not every company offers it, and terms vary, so read the contract. Other policies allow a change of option after issue, subject to the insurer's rules.
The tax-law corridor
To qualify as life insurance under section 7702, a policy must keep its death benefit above its cash value by a minimum margin. This is called the corridor. Under the guideline premium test, the corridor starts at 250% of cash value through age 40 and declines to 100% at age 95. If the account value grows so large that the death benefit under option A would fall inside the corridor, the insurer must increase the death benefit automatically, which also increases the amount at risk and the cost. This shows up in heavily funded policies at older ages and can make an option A policy behave like option B late in life.
Choosing between them
Ask these questions:
- Is the account value meant for you or for your heirs? If you plan to borrow or withdraw in retirement, option A leaves more in the account. If you want the payout to include the savings, option B does so at a price.
- How much can you pay? Option B needs a higher premium to reach the same age. A policy that lapses leaves nothing. See why universal life policies lapse, and how to prevent it.
- What does the illustration show? Ask for a side-by-side illustration of both options at the same premium, and compare the guaranteed columns. See how to read a life insurance illustration.
- What about policy loans? An outstanding loan is subtracted from the death benefit under either option. See life insurance policy loans: how they work and what they risk.
- Can you switch? Changing from B to A usually lowers the cost, while changing from A to B may require evidence of insurability because the insurer takes on more risk. Ask for the rule in writing.
Effects on cost-of-insurance increases
Because the monthly charge applies to the amount at risk, an increase in the rate costs more under option B, where the amount at risk stays high. See universal life cost-of-insurance increases and what to do.
How this applies to IUL and VUL
Both Indexed universal life (IUL) explained and Variable universal life (VUL) insurance typically offer the same choice. In a variable policy, the account value moves with the markets, so under option B the death benefit can swing more widely, and a down market lowers it.
Key takeaways
- Option A pays a level face amount; the account value is part of it, and the amount at risk falls as the account grows.
- Option B pays the face amount plus the account value, so the family receives more, but the insurance charge stays high and the premium needed is greater.
- Option A usually builds cash value faster; option B is for those who want a rising payout and can afford the higher cost.
- The Section 7702 corridor can force a higher death benefit regardless of the option you chose.
- Ask for a side-by-side illustration at the same premium before choosing.