Death benefit options (level and increasing)

When an indexed universal life (IUL) policy is set up, the policyholder chooses a death benefit option alongside the face amount. The option decides whether growth in the cash value adds to the payout or reduces the insurer's risk, and so how much cost of insurance the policy pays.

How each option works

• Level (option 1 or A). The death benefit stays at the face amount, and the cash value is absorbed into it at claim. As the cash value grows, the net amount at risk falls, so the cost of insurance is charged on a smaller amount. This option suits building cash value for retirement income.
• Increasing (option 2 or B). The death benefit is the face amount plus the cash value. The net amount at risk stays at the face amount, so the cost of insurance is higher than under the level option. This option suits a client who wants the cash value to reach the beneficiaries on top of the cover.
• Return of premium, where offered. Sometimes called option 3 or C, it pays the face amount plus the total premiums paid. The contract sets how withdrawals and any limits apply.

Minimum death benefit. Some contracts also keep the death benefit at or above a set multiple of the cash value. If the cash value grows large enough, a level death benefit then rises automatically to stay above that multiple.

Worked example

Illustrative figures, not a forecast. Face amount US$1,000,000, cash value US$300,000, total premiums paid US$250,000.

• Level: death benefit US$1,000,000; net amount at risk US$700,000.
• Increasing: death benefit US$1,300,000; net amount at risk US$1,000,000.
• Return of premium: death benefit US$1,250,000; net amount at risk US$950,000.

The cost of insurance is charged on the net amount at risk, so in this example the level option carries the lowest charge and the increasing option the highest. Return of premium carries the highest charge while the premiums paid exceed the cash value.

In an international IUL

For a client drawing retirement income through policy loans, the level option keeps the cost of insurance down as the cash value builds. For estate planning, where the policy is held in trust to meet a future inheritance or estate tax bill, the increasing option passes the cash value to the beneficiaries as well as the face amount. Some designs start on the increasing option while premiums are paid and switch to level later, for example before income is drawn. The option is checked at each annual review, alongside the face amount and the beneficiaries.

Common questions

Which death benefit option is best for cash value growth?

The level option. The net amount at risk falls as the cash value grows, so less goes on the cost of insurance and more stays in the cash value to earn index credits.

What is a return of premium death benefit?

An option, offered by some insurers, that adds the premiums paid to the face amount, so the beneficiaries receive the cover plus the money paid in. The term also names return-of-premium term insurance, a separate product that refunds premiums if the life insured survives the term.

Can you change the death benefit option on an IUL?

Usually. A switch from increasing to level is normally allowed without new medical evidence. A switch from level to increasing raises the insurer's risk, so where the contract allows it, it usually needs underwriting.

Go deeper: death benefit options in the IUL guide.