Universal Life Insurance Option A versus Option B

One of the most important universal life insurance definitions describes the difference between option A versus option B. The two choices can have a profound effect on what your beneficiaries receive at different points in time.

Flexible adjustable premiums are the hallmark of universal life insurance. But, with flexibility comes confusion and uncertainty. As a parent, you want to make confident and informed choices about how to protect and provide for their children.

Clear up some of that uncertainty by comparing the pros and cons of both alternatives. Then, an ideal buyer persona explains how these two alternatives might work in a real-world scenario.

Universal Life Insurance Option A

The universal life insurance option A definition means that the potential policy proceeds remain level and are always equal to the death benefit. Therefore, the net amount at risk to the insurance company shrinks over time as the cash value accumulates.

Get a universal life insurance quote to determine the premium costs for Option A given your age, tobacco usage, and various death benefit amounts.

Option A Pros

Lower premiums for an initial death benefit amount are the primary advantages of universal life insurance option A. Many people are looking for the most affordable way to purchase permanent coverage, and this alternative has the lower premiums of the two choices.

The primary benefit of lower premiums is that people actually buy a policy that could last up to age 100 before reaching maturity. Contrast this with term life policies.

  • Features lower initial premiums
  • Lasts 10, 20, or 30 years
  • Premiums spike after the term expires
  • Most policies lapse before death

Universal life option A is a good alternative if you want a certain death benefit to cover funeral expenses and/or to leave a legacy for your beneficiaries. You do not have to worry about a sudden spike in premiums once the term expires, making it unaffordable to continue.

Option A Cons

The primary disadvantages of universal life insurance option A are a lower future death benefit, smaller excess premium payments, and the possibility of higher future premiums.

  • The death benefit does not increase over time unless you make excess premium payments. Your beneficiaries will receive less money when you pass away, leaving a possible gap for funeral expenses or a smaller legacy.
  • Premiums may increase in the future in order to maintain policy stability. Lower than expected interest rates could require the owner to pay a higher amount to offset the lost earnings. This keeps the cash value accumulation on schedule for an age 100-maturity date.

Option A Buyer

Universal life insurance option A works best for a middle age buyer whose primary concern is a larger initial permanent death benefit rather than the possible cash value accumulation. This person may have several beneficiaries to receive funds when he or she passes away.

Our middle-aged buyer may also be approaching retirement age in the next two decades. Therefore, he or she would prefer the lower premiums to make it more affordable to keep the coverage in force after retirement.

Universal Life Insurance Option B

The universal life insurance option B definition means that the potential policy proceeds gradually increase and equal the death benefit plus the accumulated cash value. Therefore, the net amount at risk to the insurance company remains the same over time – even as the cash value grows inside the contract.

Get a universal life insurance quote to determine the premium costs for Option B given your age, tobacco usage, and various death benefit amounts.

Option B Pros

Faster cash value accumulation is the biggest advantage of universal life insurance option B. The cash value grows more quickly because of the smaller initial death benefit and the ability to make excess premium payments.

A higher percentage of the premium goes towards cash value when the death benefit is smaller. This head start allows the interest more time to compound and grow over time.

IRS rules allow higher excess premium payments, which allow faster tax-deferred interest accumulation on the cash value. The contract must meet three possible tests to remain compliant.

  • Cash value accumulation test: cash value may not exceed the “net single premium”
  • Guideline premium qualifications test: the sum of premiums paid must not exceed limitations
  • Cash value required corridor test: percentage the proceeds must exceed the fund value

Whole life policies also feature cash value accumulation. However, you do not have the choice of making excess premium payments to take advantage of the tax-deferred accumulation as you do under option B.

Option B Cons

Higher initial premium rates for a given death benefit are the biggest disadvantage to universal life insurance option B. Many people shy away from this alternative because of the higher upfront costs. It takes someone with a long time horizon to pay more in the beginning.

Also, the death benefit is much smaller in the beginning with option B. It could take many years before it catches up with the alternative. Therefore, this choice works best for people who still very young and in good health – such as children.

Option B Buyer

The faster cash accumulation and lower death benefit make universal life insurance option B an ideal choice for a juvenile policy. Many parents choose this alternative to cover their children as a clever way to fund a college education.

The Free Application for Student Financial Aid (FAFSA) form does not count cash value life insurance as an asset. Therefore, buying an option B policy for your child will not hurt their chances for need-based financial aid.

  • Premiums are more affordable when children are very young
  • More of the premium goes directly to fund cash values
  • A smaller initial death benefit is less important for children


  1. IRS Insurance Rules