With universal life insurance, you can choose how much death benefit is to be paid. You have two options, and although the options appear similar, some subtle differences between them can change the amount dramatically. With both options, your premium remains the same throughout the term of the policy, but the death benefit and surrender value differ.
Option 1: Fixed death benefit
When you choose a fixed death benefit, whatever amount you sign up for (in the example, $50,000) goes to your survivors. In actuality, the face value of the policy — the initial $50,000 —decreases by the amount you’ve accumulated in your cash value account. The death benefit remains the same because the decreased face value and the increased cash value add up to the total amount you chose.
Option 2: Increasing death benefit
With the second option, your death benefit increases in line with the increase in your cash value. Your survivors get the surrender value, which certainly appears to be a great deal more for the consumer than what Option 1 provides. So what’s the catch? Why would anyone choose Option 1?
With Option 2, your cash value increases more slowly than with Option 1. So you must continue paying the annual premiums, often when you no longer need the same kind of protection you did 25 years earlier.
Option 1: Fixed death benefit
When you choose a fixed death benefit, whatever amount you sign up for (in the example, $50,000) goes to your survivors. In actuality, the face value of the policy — the initial $50,000 —decreases by the amount you’ve accumulated in your cash value account. The death benefit remains the same because the decreased face value and the increased cash value add up to the total amount you chose.
Option 2: Increasing death benefit
With the second option, your death benefit increases in line with the increase in your cash value. Your survivors get the surrender value, which certainly appears to be a great deal more for the consumer than what Option 1 provides. So what’s the catch? Why would anyone choose Option 1?
With Option 2, your cash value increases more slowly than with Option 1. So you must continue paying the annual premiums, often when you no longer need the same kind of protection you did 25 years earlier.
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