Life insurance gives protection to your family during uncertainties. This is because of the death benefit that your family will be getting upon your death. Under variable life insurance, there are two types of death benefits: the level death benefit and the increasing death benefit. What is the death benefit? This is the sum insured of the insured’s life insurance policy that is paid out when the policyholder passes away.
If you are to purchase life insurance, it is good to know which of the death benefit is more beneficial to you, level or increasing death benefits.
A level death benefit is a benefit that will be given to the beneficiary, that is, the face value or the account value, whichever is higher. In this kind of death benefit, during the early years of the policy, while the insurance has not yet accumulated a higher account value, the face amount will be given to the beneficiary because the face amount is higher than the account value. For example, if the face value of the life insurance policy is Php500,000.00 and the policy has been running for about three years now, and the account value has accumulated of Php50,000.00, and the insured passed away, the face value of Php500,000.00 will be given to the beneficiary. But suppose the insurance has been in force for 20 years and the accumulated account value to Php750,000.00 without any withdrawal, and the insured passed away. In that case, the account value of Php750,000.00 will be given as a death benefit beneficiary. This level of death benefit is beneficial during the early years of the policy. When the policyholder pays the premium for about a year and the policy is in force, and the insured passes away, the face amount will be given to the beneficiary. Thus this death benefit is suitable for short-term benefits. This is because the cost of insurance charges is lesser due to a lower net amount at risk. Thus the accumulation account value is higher.
An increasing death benefit is a benefit that will be given to the beneficiary with the face amount and the accumulated account value. This benefit is good if you are looking for your life insurance as a long-term plan. The long term is letting your policy in force up to the age of coverage. For example, if the face value of your life insurance policy is Php500,000.00 and your policy has been in force for three years now. It accumulated an account value of Php50,000.00 when the insured passed away. The death benefit given to the beneficiary is the sum of the face value and the account value. Therefore the beneficiary will receive Php550,000.00 as a death benefit. Therefore, if the policy has been in force for 20 years now and the accumulated account value is Php750,000.00, and when the insured passes away, the death benefit will be Php1,250,000.00. The death benefit has more than doubled for 20 years, that is, if the return on the investment is high. But having an increasing death benefit has a higher net amount at risk for the insurance company. Thus the cost of insurance charges is increased. The accumulated account value is lower. But as the insurance policy is in force for a long-term year, the net amount at risk becomes lower if the investment return is higher.
Level and the increasing death benefit are both beneficial. Choose which you think fits your need.