Death benefit

In an indexed universal life (IUL) policy the death benefit sits alongside the cash value. It is paid to the named beneficiaries, or to the trust or company that owns the policy, when the life insured dies.

How it works

• Amount. The death benefit starts from the face amount, the cover agreed at underwriting. Under the level option the payout stays at the face amount; under the increasing option it is the face amount plus the cash value. See death benefit options.
• Deductions. Any outstanding policy loan and unpaid interest is deducted at claim. A partial withdrawal can reduce the death benefit permanently, depending on the contract.
• Adjustments. The face amount can be reduced later, and increased with new underwriting where the contract allows.
• Riders. A critical illness rider advances part of the death benefit on diagnosis of a covered condition, and some designs pay up to 80% of it on terminal illness.
• Duration. IUL is permanent cover: the death benefit is payable whenever death occurs, as long as the policy is in force. It stays in force while the cash surrender value covers the monthly charges, or while the conditions of a no-lapse guarantee are met.

Worked example

Illustrative figures, not a forecast. A policy has a face amount of US$2,000,000 and a cash value of US$400,000, with a policy loan of US$100,000, including interest, outstanding.

• Level option: death benefit US$2,000,000, less the loan: US$1,900,000 paid.
• Increasing option: death benefit US$2,400,000, less the loan: US$2,300,000 paid.

In an international IUL

International IUL starts at US$1m of cover, and up to US$3m can be issued without a medical for healthy applicants under 55. Most policies are owned by an offshore trust or company, so the death benefit is paid to the trustees or the company and passes under the trust deed or company arrangements, avoiding probate in several countries. The death benefit can be matched to a future estate or inheritance tax bill and paid in US dollars, so heirs avoid selling property under time pressure. For a life insured who, at death, is neither a US citizen nor domiciled in the United States, US estate tax law does not treat insurance on their life as property within the United States, so the death benefit carries no US situs estate tax in their estate.

In a PPLI structure

A PPLI structure pays a death benefit made up of the portfolio value plus the insurance element above it. Held by a trust or foundation as policyholder, it passes to beneficiaries under the deed or charter, outside probate, and where estate or inheritance taxes apply a properly structured trust can take the structure out of the taxable estate.

Common questions

Is an IUL death benefit certain to be paid?

The death benefit is an obligation of the issuing insurer, so it depends on the insurer's financial strength. It is payable while the policy is in force, which depends on the cash value covering the charges, or on the conditions of a no-lapse guarantee being met where the contract has one.

Is the death benefit taxable?

Beneficiaries generally pay no income tax on it in the jurisdictions where Capital for Life works. In the UK, where an international IUL is taxed like an offshore bond, the death of the life insured is a chargeable event for a UK-resident policyholder: the gain is worked out on the surrender value immediately before the death, not on the death benefit (Income Tax (Trading and Other Income) Act 2005, sections 484(1)(b) and 493(7)). Inheritance or estate tax depends on who owns the policy and where the people involved live, which shapes the choice of trust or company ownership.

What is a permanent death benefit?

Permanent cover pays whenever death occurs, as long as the policy is in force. IUL is permanent life insurance; term cover pays only if death occurs within the term, which usually runs 10 to 30 years.

Go deeper: how IUL works and family protection and estate planning.