chapter 11

COMPUTATION OF DEATH BENEFIT AMOUNT

Although every life insurance policy has a death benefit, the calculation of the amount payable to the beneficiary at the insured�s death begins, not ends, with that amount. A sample contract provision governing the amount of the death benefit provides as follows:

The insurance benefits we will pay upon the death of the insured include the following amounts: the face amount of the policy, plus any death benefits due from any riders to this policy, plus any amount due from dividends paid under this policy, plus or minus any adjustments for the last premium, minus any loan (and any unpaid loan interest) on the policy. To this amount we will add interest from the date of death to the date we pay the death benefit.

Depending on how the policyowner has used the benefits and options available in an insurance policy, the actual amount payable may be quite different from the face amount printed on the policy. In fact, if the policy is providing coverage under the nonforfeiture option�which provides a reduced amount of paid-up insurance�then the policy�s face amount is not relevant to the calculation of the death benefit at all. The death benefit payable under the reduced paid-up insurance option depends on the policy cash value when the nonforfeiture option is elected. Furthermore, under variable, variable universal, or universal life insurance policies, there may be a changing death benefit based upon the provisions of those contracts and the investment performance of the cash accumulation account.

Adjustments to Death Benefit Amount

After any changes have been made to the death benefit as described above, there is the possibility of the following additional adjustments:

The first adjustment may be as a result of postclaim underwriting. If it is discovered that the insured�s age or sex has been misstated, the contract is likely to require that the policy�s death benefit be adjusted to the amount that the premium paid would have purchased at the accurate age or sex.

It is also possible that an adjustment will result in the elimination of the death benefit entirely. In these circumstances, the company will refund the premiums paid, usually without interest. This would be the case if the insured dies within the policy�s contestable period and the insurer discovers a material misstatement in the application. This would also be the case in the event of a suicide within the time period before the policy�s suicide exclusion clause expires. If the policy contains an exclusion for death as a result of war or aviation, the insured�s beneficiary in these circumstances will not receive the normal death benefit but may be entitled to receive the larger of (1) a refund of premiums paid or (2) the net cash value.

The insurer then adds any additional death benefits purchased by the policyowner under the terms of the contract. These include any paid-up additions, accidental death benefits, or other riders.

This is followed by any premium adjustments provided under the contract or by state law. For example, premiums paid for insurance coverage after the month in which the insured died may be refundable based upon a policy provision or state law. There may also be premium adjustments that reduce the death benefit. These include any premiums due but unpaid at the insured�s date of death as well as any unpaid premium loans plus any unpaid interest on those loans. If the insured dies while coverage is being provided under a premium receipt, premiums paid in advance for periods after the date of the insured�s death will also be added to the death benefit.

The death benefit may also be reduced by any benefit amounts previously withdrawn from the policy. This includes the amount of any unpaid policy loans plus any unpaid interest on those loans. If the policy permits cash withdrawals in a nonloan format�as is possible with universal life, variable life, and variable universal life policies�that also reduces the amount of the death benefit. If the insured has withdrawn policy values under a policy provision that permits the payment of any accelerated death benefits, the death benefit is reduced by the amount of such benefits already paid out.

Some insurers may include termination dividends for policyowners whose policies have been in effect for specified periods of time. Dividends accumulated by the insurer at interest will also be payable with the death benefit.

Finally, a policy provision or state law may require that the insurer add interest to the death benefit for the period between the insured�s death and payment to the beneficiary.

Table 11-1 shows the formula for calculating the death benefit.

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