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.
Level vs. Increasing Death Benefits in Life Insurance: A Comprehensive Guide
When planning for the financial security of your family, understanding the types of death benefits offered by life insurance policies is crucial. In the realm of life insurance, particularly in policies with a savings or investment component like variable life insurance, you will encounter two primary types of death benefits: level and increasing. This guide aims to clarify these options, helping you make an informed decision based on your long-term financial goals and the needs of your beneficiaries.
Overview of Death Benefits
Before delving into the specifics, it’s important to grasp what a death benefit actually entails:
- Death Benefit: The amount paid to the beneficiaries upon the death of the insured, which is the cornerstone of a life insurance policy’s value.
What is a Level Death Benefit?
Definition and Characteristics
- Stability and Predictability: A level death benefit remains constant throughout the policy’s duration unless altered by policy loans or withdrawals.
- Benefit Calculation: The beneficiary receives either the face value of the policy or the account value, whichever is higher at the time of the insured’s death.
Advantages of Level Death Benefits
- Simplicity: Easier to understand and plan for, as the benefit does not fluctuate with the underlying investments of the policy.
- Cost Efficiency: Typically incurs lower insurance charges over time, as the net amount at risk decreases with the growth of the cash value.
Ideal Candidates for Level Death Benefits
- Short-term Policyholders: Those who desire coverage for a specific period or until a certain goal is met, such as a mortgage payment or until children are financially independent.
What is an Increasing Death Benefit?
Definition and Dynamics
- Growth Potential: The death benefit includes both the face amount of the policy and any accumulated cash value, thus increasing over time as the cash value grows.
- Benefit Calculation: The total death benefit is the sum of the face value plus the current account value of the policy at the time of the insured’s death.
Advantages of Increasing Death Benefits
- Enhanced Coverage: Provides a higher benefit amount over time, which can be more aligned with growing financial needs due to inflation or changes in living standards.
- Long-term Investment: Appeals to those using life insurance as a wealth-building tool, as it can significantly increase the value received by beneficiaries.
Ideal Candidates for Increasing Death Benefits
- Long-term Investors: Suitable for individuals who plan to keep their policy active for many years and are interested in maximizing the investment component of their life insurance.
Choosing Between Level and Increasing Death Benefits
Factors to Consider
- Financial Goals: Reflect on whether you need life insurance to provide a specific amount at death or if increasing financial security aligns better with your objectives.
- Age and Health: Younger policyholders or those in good health might benefit more from increasing death benefits due to the longer period available for cash value growth.
- Risk Tolerance: Consider your comfort with the potential fluctuations in cash value that could affect the death benefit in an increasing scenario.
Policy Review and Adjustments
- Regular Reviews: Life circumstances and financial goals evolve, necessitating periodic reviews of your life insurance coverage to ensure it still meets your needs.
- Professional Advice: Consult with financial advisors or insurance professionals to analyze which type of death benefit aligns best with your estate planning or financial growth strategies.
Making an Informed Choice
The decision between level and increasing death benefits depends largely on your personal financial situation, goals for the future, and the needs of your beneficiaries. By understanding the nuances of each option, you can strategically plan to secure your family’s financial future, ensuring that your life insurance policy serves as a reliable safety net, tailored to your life’s objectives.