Under Option B, the death benefit includes the annual increases in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expense of this option is much higher than that for Option A, therefore causing the cash value to be lower in the older years (all else being equal).
Universal life offers two death benefit options to the policyowner. Option A is the level death benefit option, and Option B is the increasing death benefit option. Under Option A, the death benefit remains level while the cash value gradually increases, therefore lowering the pure insurance with the insurer in later years. The reason the above Option A illustration shows an increase in the death benefit at a later point in time is so that the policy will comply with the "statutory definition of life insurance" that was established by the IRS. According to the definition, there must be a specified "corridor" or gap maintained between the cash value and the death benefit in a life insurance policy. The percentage that applies to the corrido is established in a table by the IRS and varies as to the age of the insured and the amount of coverage. If the corridor is not maintained, the policy is no longer defined as life insurance for tax purposes and consequently loses most of the tax advantages that have been associated with life insurance.
Under Option B, the death benefit includes the annual increases in cash value so that the death benefit gradually increases each year by the amount that the cash value increases. At any point in time, the total death benefit will always be equal to the face amount of the policy plus the current amount of cash value. Since the pure insurance with the insurer remains level for life, the expense of this option is much higher than that for Option A, therefore causing the cash value to be lower in the older years (all else being equal).
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