The Risk of Adjustable Death Benefits in Universal Life: When the Cost Increases

Universal Life (UL) often allows policyholders to choose between a **Level Death Benefit (Option 1)** and an **Increasing Death Benefit (Option 2)**. While Option 2 provides a higher payout, it carries specific risks related to the cost of insurance (COI).

Understanding Option 2 (Increasing Benefit)

Under Option 2, the death benefit is equal to the initial face amount *plus* the cash value. As the cash value grows, the death benefit increases. However, the insurer is insuring the full, increasing amount, meaning:

• Higher Cost of Insurance (COI): The Net Amount at Risk (NAR) remains constantly high (or increases), resulting in a much higher deduction of COI from the cash value each month compared to Option 1.
• Faster Cash Value Drain: The higher COI means the cash value must grow much faster to keep the policy solvent, increasing the risk of lapse if market returns are poor (in IUL) or interest rates are low (in traditional UL).

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Policyholders should only choose Option 2 if they need a rapidly increasing death benefit and commit to aggressively funding the policy.