Fees and charges inside permanent life insurance

Permanent life insurance carries several kinds of charges, some listed on your statement and some built into the premium or the crediting rate. Universal and variable policies deduct them from the cash value each month: a cost of insurance charge for the death benefit, administrative and premium-load charges, rider charges and, in variable policies, fund and mortality-and-expense fees. Whole life does not itemize them, but the same costs are in the premium. Surrender charges apply if you cancel in the early years.

Knowing which charges exist, which are guaranteed and which the insurer can change tells you where a policy's real cost is, and what to ask for in an how to request and read an in-force illustration.

The main charges

Cost of insurance

The COI charge is the heart of a universal policy. Each month the insurer deducts the cost of insurance, which is a rate per $1,000 of the net amount at risk (the death benefit minus your cash value), based on your age, sex and rate class. The rate rises as you age. A policy with a level premium can look stable while the COI quietly grows, and the cash value has to cover it.

The policy states a guaranteed maximum COI rate and the insurer may charge a lower current rate. Insurers can raise current rates up to the guaranteed maximum. When they have done so on older blocks of policies, litigation followed. A Transamerica settlement announced October 4, 2018 was $195 million, covering about 70,000 policies with increases of up to 38% (Consumer Watchdog). See universal life cost-of-insurance increases and what to do and cost-of-insurance lawsuits against life insurers: cases and outcomes.

Premium loads and administrative fees

Many universal policies deduct a percentage of each premium before it reaches the cash value, and a flat monthly administrative fee. The load is why the policy's early cash value is lower than the premiums paid. Ask for both the current and the guaranteed values.

Variable life: three layers

Variable universal life (VUL) insurance adds investment charges. The cash value sits in subaccounts similar to mutual funds, each with its own expense ratio, and the insurer charges an M&E fee on top of the COI and administrative charges. These are disclosed in the prospectus; see variable life insurance and the securities rules that govern it. Because multiple layers apply, VUL and other policies with investment components are worth comparing on total annual cost, not just on fund performance.

Indexed universal life

In Indexed universal life (IUL) explained, the visible fee list resembles other universal life, while the cost of the index approach shows up through caps, participation rates and spreads that limit credited interest. Those are not itemized charges, but they determine what you earn net of costs. See IUL caps, participation rates and floors and IUL pros and cons: what the sales pitch leaves out.

Whole life: costs are inside the premium

A traditional whole life policy states a level premium and guaranteed cash values. Commissions, expenses and mortality charges are built in rather than deducted line by line. The offset is that the insurer takes the investment and mortality risk. Dividends from a participating policy can reduce the net cost, but are not guaranteed; see whole life dividends: how participating policies pay and what whole life insurance costs and why.

Who benefits from knowing the fees

If you keep a policy for life and use it as designed, the charges are the price of guarantees and may be acceptable. They matter most when:

• You will hold the policy only a few years, since early charges and the surrender period weigh heavily.
• You are comparing policies for cash value growth rather than death benefit. Cash value accumulation is net of all charges. See whole life as an investment: what the returns really are.
• You are paying premiums at a level that no longer covers the charges. In that case the cash value declines and the policy may lapse; see why universal life policies lapse, and how to prevent it.

How to find your actual charges

1. Request an in-force illustration at current and guaranteed assumptions. how to request and read an in-force illustration explains how.
2. Request the annual statement and look for a monthly deduction breakdown (COI, admin, riders, loads).
3. Ask for the policy's guaranteed maximum COI rates and current rates.
4. For variable policies, read the prospectus for the M&E charge and each fund's expenses.
5. Check the surrender schedule in the policy contract or ask the insurer for a current surrender value.
6. Compare with alternatives using the annual life insurance policy review checklist and, if you are weighing keeping or surrendering, the keep, surrender or sell your policy?.

What to ask a seller

• What is deducted from my cash value each month, and what part is guaranteed?
• Which charges can the insurer change, and has it raised any on this product's existing policies?
• What is the surrender charge schedule, and when does it end?
• What does the illustration show at the guaranteed assumptions, not only the projected ones?

Key takeaways

• Universal and variable policies deduct charges from cash value each month: cost of insurance, administrative fees, loads and rider costs; variable policies add M&E and fund expenses.
• Whole life builds comparable costs into the premium instead of showing them line by line.
• Insurers can raise current cost of insurance rates up to guaranteed maximums, which led to settlements such as Transamerica's $195 million (announced October 4, 2018).
• Ask for an in-force illustration at both current and guaranteed assumptions to see what the charges do over time.
• Surrender charges and early loads make permanent coverage a poor fit for people who may cancel within the first years.