How To Determine The Total Death Benefit Of A Universal Life Insurance Policy

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The single biggest question a perspective and current policy holders of a Universal Life (UL) insurance policy have is: how much will my policy pay out to my beneficiaries when I die

? To answer that question, one has no further to look than the policy itself. Yes, it's true that the policies often contain wording in their policies that are difficult to understand, but if a dispute with an insurer should ever arise, it will be the policy that will be referred to.

Back in 1993, I converted a whole life policy with a major insurer into a variable universal life (VUL) policy with a little known company. I did so based on a great sales pitch about being able to retire as a millionaire if I would just pay $200/mos into the VUL.

I later came to understand that particular policy was not in my best interest and when I called the insurer ready to complain to them, the customer rep abruptly stopped me from speaking and said, "I know you're upset but we don't guaranty anything the agent says. We go strictly by what's in the policy". So, I learned a valuable lesson that I must be familiar with the language of life insurance policies in order to get the best deal. It's a lesson true of many things in life: education is the key.

Now, let's get to the crux of the matter: the death benefit paid on UL policies by life insurance companies.

First off, you'll need to know what the face value of your policy is. That is the initial amount your beneficiaries can receive. So if your universal life policy is for $100,000 of coverage and you die once the policy is issued that's what your heirs get.

Next thing to consider is outstanding loans. If your policy permits loans and you take advantage of that feature, obviously any unpaid principal on the loan is deducted from your payout. Policy holders are usually not required to repay the principle loan amount just the interest owed on the loan. If the policy holder doesn't pay the interest then that amount is chipped away from the cash value in the policy and will lower your final payout.

Lastly, the cost of insurance is another factor that will affect your payout. Universal life policies work as one year term policies that are automatically renewed annually based on your attained age.

So if you buy a policy when you're young, the cost of insurance is low but as you get older (and the likelihood of dying increases) so does the annual premium for the insurance portion. If your premium is big enough to pay for the insurance part fine. If it is not then the cost of insurance is deducted from your cash value thus lowering the amount of money available to your heirs. Making sure your premium payments are sufficient to fund the universal life policy will ensure that the cash value portion grows and meets the cost of the life insurance.

Now, check your policy to see if the death benefit will be the face value of the life insurance policy plus the cash value as not all policies cover receiving both and that too will affect the death benefit. Do you due diligence. Not all life insurance companies are the same and nor all their products the same.

Remember, universal life policies are not a 'set it and forget it' proposition. You must review the policy annually to ensure that the policy has sufficient resources to cover the ever increasing cost of the life insurance. Otherwise, you run the risk of the cost of insurance eating up the available cash value and having the policy lapse (get cancelled).

Any permanent life insurance policy is like a car: it has to be regularly maintained to run well. As long as you do that, you'll have a realistic expectation of what your heirs will receive when you die.

by: Shaun Greer

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