Universal Life Insurance Death Benefit Options
Universal life insurance gives the policy owner two death benefit options: Option A (also called Option 1) is a level death benefit that stays constant, while Option B (Option 2) is an increasing death benefit that grows with cash value or premiums paid. The choice between them affects your cost of insurance, your MEC limits, and how much premium you can put into the policy.
When you apply for a universal life insurance policy, you will need to choose which option you want. In some cases you can change the option later, but there are important rules and consequences that make the initial choice worth understanding thoroughly.
- Option A (level) keeps costs lower over time because the net amount at risk shrinks as cash value grows — but it restricts how much premium you can pay without triggering MEC rules
- Option B (increasing) costs more because the net amount at risk stays constant — but it gives you significantly more room to fund the policy aggressively
- Most policy owners who switch go from B to A after the accumulation phase — this is a deliberate strategy, not a correction
- A death benefit option change is reversible; a face amount change is not — they are different decisions
- Some insurers offer a third option where the death benefit increases by premiums paid rather than cash value
Option A vs Option B at a Glance
Both options are available on the same policy chassis. The right choice depends on your goals — cost efficiency versus funding capacity and death benefit growth.
Death Benefit Option A: Level Death Benefit
The first death benefit option is a level death benefit, often called Option A or Option 1. Under this structure, the payable death benefit remains constant throughout the life of the policy regardless of accumulated values or premiums paid by the policy owner.
You may notice that in advanced years, a universal life insurance policy using Option A does experience an increasing death benefit. This is due to regulations that govern what qualifies as life insurance versus other financial accounts. When cash value would otherwise push a policy out of compliance, the death benefit automatically increases to maintain its legal status as life insurance.
How Option A Lowers Your Costs
Choosing a level death benefit tends to produce lower overall insurance expenses. As cash value grows, the gap between the death benefit and the cash value decreases. The insurance industry calls this gap the Net Amount at Risk (NAAR) — and it is the value all insurers use to calculate your cost of insurance charges.
Consider a simple example. You own a universal life policy with a $1,000,000 death benefit and $100,000 in cash value. You pay insurance charges on only $900,000 — the actual death benefit at risk. If next year the cash value grows to $150,000, your insurance charges now apply to just $850,000.
Over time, this declining NAAR creates a compounding cost advantage.
The MEC Tradeoff
Lower costs are not the whole story. Option A can also severely restrict the amount of premium a policy owner can pay into the policy while staying compliant with Modified Endowment Contract (MEC) rules. If you intend to fund the policy aggressively — putting in more than the minimum premium to build cash value faster — Option A's MEC limit may be a binding constraint.
Why MEC status matters: A policy classified as a MEC loses its tax-advantaged withdrawal treatment. Distributions come out gains-first (taxable) and carry a 10% penalty if taken before age 59½. For policy owners planning to access cash value during their lifetime, triggering MEC status defeats a major advantage of life insurance.
This limitation may not be worth the savings in raw cost of insurance — especially for policy owners whose primary goal is cash value accumulation rather than pure death benefit efficiency.
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Death Benefit Option B: Increasing Death Benefit
The second death benefit option allows the death benefit to increase based on a feature of the policy. Most commonly, the death benefit increases by the amount of accumulated cash value.
For example, say you purchased a $1,000,000 death benefit universal life policy. Five years later, your cash value has grown to $100,000. Under Option B, your total payable death benefit is now $1,100,000 — the original face amount plus the cash value.
Why Option B Costs More
Under the increasing death benefit option, the Net Amount at Risk remains constant year over year. In the example above, the NAAR stays at $1,000,000 in every year regardless of how much cash value accumulates. That means the insurer is always at risk for the full face amount — and charges you accordingly.
Two Distinct Reasons to Choose Option B
The increasing death benefit option serves two very different purposes depending on the policy owner's objectives.
Growing death benefit protection. Policy owners who need a higher death benefit as their obligations grow — or who want to keep pace with inflation's erosion of buying power — may choose Option B specifically to let the death benefit increase over time without purchasing additional coverage.
Greater premium funding capacity. Option B allows significantly more premium to go into a universal life policy without violating MEC rules. Even though the cost of insurance is higher than Option A, the additional money flowing into the policy — and the compounding it produces — can more than outweigh the increased expense. This is the primary reason most cash-value-focused policy owners choose Option B.
Third option at some carriers: While cash value accumulation is the most common driver for the increasing death benefit, some insurers offer a variation where the death benefit increases by premiums paid rather than cash value. A few companies even make this a distinct third death benefit option. This is far less commonly available.
Which Option Should You Choose?
The right death benefit option depends less on the product itself and more on what you are trying to accomplish with the policy. Here is how to think through it based on your primary goal.
Choose Option A If…
Your GoalYou want pure death benefit protection at the lowest long-term cost, and you do not plan to overfund the policy beyond scheduled premiums.
Typical ProfileSomeone who needs a specific death benefit amount and values cost efficiency over cash value growth. Often older buyers or those with fixed income needs.
Watch Out ForMEC limits — if you ever want to make additional premium payments, Option A gives you far less room before triggering MEC status.
Choose Option B If…
Your GoalYou want to maximize cash value accumulation by funding the policy aggressively, or you want a death benefit that grows over time without buying additional coverage.
Typical ProfileCash-value-focused buyers who plan to use the policy as a long-term asset — especially those who intend to access cash value through policy loans later.
Watch Out ForHigher ongoing cost of insurance charges — the NAAR never decreases, so you need the additional cash value growth to justify the cost difference.
Many experienced policy owners start with Option B during the accumulation phase — when they are actively funding the policy and building cash value — then switch to Option A once they reach their target death benefit or want to reduce costs. This is not indecision. It is a deliberate two-phase strategy that captures the benefits of both options at different stages of the policy's life.
Product suitability depends on individual circumstances including age, health, income needs, time horizon, and existing assets. This is general education, not a recommendation for any specific product.
Changing the Death Benefit Option
Universal life insurance policy owners can change their death benefit option after the policy is in force. But the ease of making the change — and the requirements — differ significantly depending on direction.
Usually not required
Why owners switchReached desired death benefit level, or want to reduce ongoing costs
EffectDeath benefit locks at current amount; NAAR begins declining as cash value grows
Typically required — insured must pass a health review
Why owners switchHighly case-specific situations; needs have changed or MEC room is needed
EffectDeath benefit begins increasing with cash value; NAAR resets to full face amount
The most common pattern is switching from Option B to Option A. The policy owner benefits from the increasing death benefit during the accumulation years, then locks in a level death benefit to reduce expenses going forward. This is a deliberate strategy — not a sign that the original choice was wrong.
Switching from A to B is far more unusual and requires the insured to undergo underwriting, essentially proving they are insurable at the time of the change. The circumstances that warrant this switch are so specific to the individual that they resist easy categorization. It happens, but it is rare.
When Does Switching Make Sense?
There is no universal rule for when to switch from Option B to Option A, but the decision usually comes down to one of three triggers. The first is reaching a death benefit goal — the policy owner set a target death benefit, and Option B's growth has reached it. The second is a shift in priorities — the accumulation phase is over, and the owner now wants to minimize ongoing costs rather than maximize funding. The third is age-related — as the insured gets older, cost of insurance charges increase, and keeping a constant NAAR under Option B becomes increasingly expensive.
In practice, the switch most often happens after 10–20 years — once the policy has built substantial cash value and the owner is transitioning from an accumulation mindset to a preservation or income mindset. But this is case-specific, and there is no one-size-fits-all timeline.
Different from a Face Amount Change
A death benefit option change is not the same thing as a death benefit amount change. Universal life insurance allows policy owners to rather easily adjust the face amount of their policies — something that is often far more easily accomplished with universal life than with whole life insurance.
| Feature | Death Benefit Option Change | Face Amount Change |
|---|---|---|
| What changes | How the death benefit is calculated (level vs. increasing) | The dollar amount of death benefit |
| Reversible | Yes — can switch back | No — changes are irrevocable |
| Underwriting | Only for A → B switch | Usually required for increases |
| How often | Can be done multiple times (extremely unusual) | Typically a one-time decision |
The key distinction: changing the face amount is an irrevocable adjustment to the total death benefit outstanding on the policy. Changing the death benefit option simply changes the formula — level or increasing — without permanently altering the face amount. In theory, a policy owner could switch options multiple times, although doing so is extremely unusual in practice.
For a deeper look at how universal life insurance compares to whole life — including how each handles death benefits and cash value growth — see our complete guide to indexed universal life insurance.
Not Sure Which Option Is Right for Your Policy?
Death benefit options affect costs, MEC limits, and long-term flexibility in ways that depend entirely on your situation. A 30-minute call is enough to get clarity.
Schedule a 30-minute call Prefer to write? Send us a messageProduct suitability depends on individual circumstances including age, health, income needs, time horizon, and existing assets. This is general education, not a recommendation for any specific product.
I have an old universal life policy Option A, with a guaranteed interest rate of 4.5%. In this low rate environment, switching to Option B seems to make a lot of sense. I can always switch back if rates rise. Am I looking at this correctly?
Normally you can’t just switch to option B without undergoing the underwriting process to approve the increasing death benefit.