Variable universal life insurance policies give you the benefit of permanent life insurance coverage with a death benefit but also offer you an investment account that can lower your premium payments or raise your death benefit. Unfortunately, the investments can also go down. If the investments perform well over time, the cash value fully funds the policy, and your death benefit stays intact. If the investments don't perform well, the policy can lapse, and your beneficiary can lose your death benefit. To deal with this risk, variable universal life policies offer riders -- additional coverage added to the basic policy for an extra cost -- that provide a guaranteed death benefit.
Choosing a Death Benefit
Most variable universal life policies give you a choice of three death benefit options within the policy. The level death benefit stays consistent, or fixed, throughout the life of the policy and equals the face amount of the policy. The variable death benefit varies based on the underlying value of your selected investment account. This option offers a fixed death benefit but also has a separate account, the value of which fluctuates based on the investments. The return-of-premium option allows the insured to get a portion of the paid premium back once the policy accumulates a certain amount of cash value, but the death benefit does not increase.
Guaranteed Minimum Death Benefits
The insured chooses the death benefit option, and the insurance company guarantees the death benefit as long as the policy stays active. The guaranteed minimum death benefit rider guarantees that the policy stays in force and thereby guarantees the death benefit. In other words, the add-on coverage guarantees the death benefit by guaranteeing that the policy does not lapse. If you add a guaranteed minimum death benefit rider, the value of the death benefit is protected against the inherent risks of the variable account performance.
Variable universal life policies offer flexible premium payments. If the cash surrender value in the policy covers the monthly deduction, you don't have to pay a monthly premium on the whole policy. If the monthly deduction -- including the cost of the insurance, separate account administrative charges and charges for any other policy riders -- exceeds the cash surrender value, the policy lapses and nullifies the death benefit. This can occur due the variable nature of your investment account inside the policy.
Protecting Your Death Benefit
To secure the guaranteed minimum death benefit you must pay the monthly minimum premium for the additional rider. This amount is established when the policy is issued. This guarantees that the guaranteed minimum death benefit gets activated to pay the monthly deduction if your cash surrender value dips below the amount of the necessary payment. Typically, you must select the rider for a specific period of years. To maintain the guaranteed minimum death benefit, some insurers may prohibit or limit the amount of money you can loan yourself during the initial years of the guaranteed minimum death benefit period. This rider ends after the specified time period is over; if you take out a restricted loan; if you cancel, surrender or terminate the policy; or if you don't meet your guaranteed minimum death benefit premium obligation.
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