Death Benefit: The total amount payable to the beneficiary upon the death of the insured. If loans are outstanding at the time of death, the actual cash payment is equal to the death benefit less the amount of the outstanding loan. The death benefit may include amounts in addition to the initial face amount of the policy such as accumulated dividends, the accumulation value of universal life policies, or increases forced by the death benefit corridor (see Definition of Life Insurance below).
Death Benefit Option: Universal life policies generally offer two (2) types of death benefits: 1) Option A or 1 where death benefits are level and equal to the original face amount in all years, and 2) Option B or 2 where death benefits are equal to the original face amount plus the account value of the policy, and thus are generally increasing (but also can be decreasing if/when policy account values are declining but usually not less than the original face amount). Whole Life policy death benefits are similarly either level (when mixed with a term insurance) or increasing during premium payment years (and then decreasing after premium payments have stopped, but again usually not less than the original face amount).
DEFRA: The Deficit Reduction Act (DEFRA) of 1984 expanded the rules originating with TEFRA to provide general set of qualifications to apply to all policy contracts and included mathematical calculations for ongoing testing (see Definition of Life Insurance below).
Definition of Life Insurance (DOLI): The Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 provided a statutory definition of life insurance for flexible premium (i.e., Universal Life) products that limited the amount of premium per dollar of death benefit and required at least a minimum amount of pure risk coverage in order to be treated as life insurance for income tax purposes under IRC §101 (i.e., tax-free death benefits). TEFRA was subsequently modified by the Deficit Reduction Act (DEFRA) of 1984 to expand these general set of qualifications to apply to all policy contracts and included mathematical calculations for ongoing testing. IRC §7702(a) provides that, for a contract to qualify as a life insurance contract for Federal income tax purposes, the contract must be a life insurance contract under the applicable law and must either (1) satisfy the cash value accumulation test of §7702(b), or (2) both meet the guideline premium requirements of §7702(c) and fall within the cash value corridor of §7702(d). (Also see Guideline Premium Test and Cash Value Accumulation Test).