A worksheet to test your universal life statement for charge creep

A universal life policy can get more expensive in two quite different ways. The cost of insurance rises every year because you are older, and that is built into the contract. It can also rise because the insurer changed its current rates, and that is the part worth testing. The worksheet below turns the annual statement into one number per year, the effective cost per $1,000 of risk, and sets it beside two reference points: what the insurer's own projection said it would be, and the maximum the contract allows.

You need three documents and an hour. Everything here is arithmetic you can do with a calculator or a spreadsheet, and every figure in the worked example is invented for illustration. None of it is a price, and none of it describes any insurer's policy.

What you are testing, and what you are not

The monthly charge for the death benefit in a universal life policy is the cost of insurance rate multiplied by the net amount at risk. The net amount at risk is, roughly, the death benefit minus the account value. The rate is quoted per $1,000 of that amount and climbs with attained age. The contract lists a guaranteed maximum rate and the insurer charges a lower current rate, which is a non-guaranteed element. The guide on universal life cost-of-insurance increases and what to do explains why insurers raise it and what documented lawsuits have said.

The worksheet cannot tell you whether an increase was proper under your contract. That depends on the contract's wording about which factors may move the rate, and it is a question for the insurer, a consultant or a lawyer. What the worksheet can do is show you whether the charge on your statement matches the schedule you were shown, how far it sits below the guaranteed maximum, and whether a jump in one year is explained by age and a shrinking net amount at risk or by something else. A clear, documented difference is a far better starting point for a phone call than a general feeling that the policy costs more.

Step 1: Gather three documents

1. The annual statement for each of the last three or four policy years, ideally covering the same anniversary dates. Many insurers also post past statements in the online account.
2. The policy contract's data pages. Find the schedule titled something like "Table of Guaranteed Maximum Monthly Cost of Insurance Rates" and the paragraph on how current rates are determined. Write down which mortality table, if any, the guaranteed rates use.
3. An how to request and read an in-force illustration. Ask the insurer for one at current assumptions with the same premium you are paying. Its year-by-year columns show the charges the insurer projects at today's rates. If you kept the original sales illustration, it is a useful extra reference for what was projected at purchase, but the in-force version is the fair comparison. The guide to how to read a life insurance illustration explains the columns.

If the statement lumps all deductions into one line, ask for the monthly detail. An insurer can provide a breakdown that separates the cost of insurance from expense charges, administrative fees and rider costs. Without that split the arithmetic below cannot work.

Step 2: Copy the numbers from each statement

For each policy year, fill in the blanks below. Use the amounts for the year the statement covers, not the year it was mailed.

Check that your own numbers reconcile before going further: start value, plus premiums, plus credits, minus all deductions, should equal the end value, give or take any loans or withdrawals. If the equation does not close, you have missed a line, and every later step will be off.

Step 3: Compute the effective cost per $1,000

Two quick calculations turn the raw charge into a rate you can compare.

1. Average account value = (C + D) ÷ 2.
2. Average net amount at risk = B − average account value, when the policy has a level death benefit (option A). If the policy uses an increasing death benefit (option B), the death benefit is the face amount plus the account value, so the net amount at risk stays close to the face amount. Check Universal life death benefit options A and B if you are unsure which one you have.
3. Effective annual cost per $1,000 = G ÷ (average net amount at risk ÷ 1,000).
4. Effective monthly cost per $1,000 = the annual figure ÷ 12.

This is an approximation. The insurer calculates the net amount at risk month by month, usually at the start of each month, and some contracts discount the death benefit for assumed interest. Expect your estimate to differ slightly from the insurer's own. You are looking for large, repeated or unexplained gaps, not for a match to the cent.

A worked example

Say Marcus, a hypothetical policy owner, holds a $250,000 universal life policy with a level death benefit. He pulls three statements. Every figure below is invented.

The arithmetic for each year:

• Year 1: $1,248.00 ÷ ($208,000 ÷ 1,000) = $1,248.00 ÷ 208 = $6.00 per $1,000 per year, or $0.50 per month.
• Year 2: $1,346.40 ÷ 204 = $6.60 per $1,000 per year, or $0.55 per month.
• Year 3: $1,829.10 ÷ 201 = $9.10 per $1,000 per year, or about $0.758 per month.

Two things stand out already. The dollar charge rose from $1,248.00 to $1,346.40 between years 1 and 2, a rise of $98.40, or 7.9% ($98.40 ÷ $1,248.00). That is less than the rate rise of 10% (from $6.00 to $6.60) because the net amount at risk fell as the account value grew. Between years 2 and 3 the dollar charge rose $482.70, or 35.9% ($482.70 ÷ $1,346.40), while the net amount at risk fell again. Something other than the shrinking cushion drove that jump, and the per-$1,000 figure shows it: the rate went from $6.60 to $9.10, an increase of 37.9% in one year.

An aging insured does face rising rates. A rise of 37.9% in a single year, at ages 61 to 62, is far steeper than the age-to-age step the earlier years showed. The next step tests it.

Step 4: Compare with the schedule the insurer showed

Open the in-force illustration and find the projected cost of insurance for the same years. Many illustrations show the annual charge in dollars rather than the rate, so convert it using the same method as above. Say Marcus's in-force illustration, run before the Year 3 statement arrived, projected current rates of $6.00 at age 60, $6.60 at age 61 and $7.30 at age 62.

For year 3, $9.10 ÷ $7.30 = 1.2466, so the charged rate is about 24.7% above the projected one. Years 1 and 2 matched. That pattern, matching for several years and then a step, is what a rate change looks like. A steady gap in every year would more likely mean the illustration was run with different assumptions or that your approximation of the net amount at risk differs from the insurer's method.

A rate step is not by itself a wrong. The contract may allow it, and the insurer should have sent you a notice. Check your records: did a letter arrive before the anniversary? The worksheet tells you what happened, not whether it was permitted.

Step 5: Compare with the guaranteed maximum

Find the guaranteed maximum rate for each attained age in the contract schedule. Contracts state it per $1,000 per month, so multiply by 12 to compare with an annual figure. Say Marcus's schedule shows a guaranteed maximum of $1.458 per $1,000 per month at age 62.

• Annual maximum: $1.458 × 12 = $17.50 per $1,000.
• Share of the maximum in use: $9.10 ÷ $17.50 = 0.52, or 52%.

So after the step, Marcus's current rate is a little over half of the contractual ceiling. That matters in two ways. It means the insurer still has room to raise the charge further without exceeding the contract, and the policy's long-term projections at the guaranteed rates would look much worse than the current-rate version. It also means the increase was not the insurer jumping straight to the ceiling.

The comparison also gives you a worst-case projection to ask for. The guaranteed values column of an illustration shows what happens if the insurer charges the maximum rate and credits only the minimum interest. If that column shows the policy running out of money in your seventies, the policy depends on the insurer's current rates staying where they are.

Step 6: Look at the other deductions

Back on the statement, line H holds everything that is not the cost of insurance: premium load or expense charges, monthly administrative fees, per-$1,000-of-face charges, and rider costs. Add G and H for each year and divide by the average account value.

For Marcus's third year, say H is $540 for the year and the average account value is $49,000.

• Total deductions: $1,829.10 + $540.00 = $2,369.10.
• Share of average account value: $2,369.10 ÷ $49,000 = 0.0483, or 4.8%.

The same sum for year 2 is ($1,346.40 + $540.00) ÷ $46,000 = $1,886.40 ÷ $46,000 = 4.1%. Look for line H changes as well as line G changes. A flat administrative fee that doubles, or a rider charge that appears for the first time, is a separate question from the cost of insurance and has a separate paragraph in the contract. If total deductions as a share of the account value keep climbing, the policy is on the path described in why universal life policies lapse, and how to prevent it, where charges outrun the credits and the cushion thins out.

Step 7: Project forward

You do not need an actuary to run a rough view of the next few years. Take the latest per-$1,000 rate and ask what happens if it rises by the same percentage it just did.

For Marcus: a repeat rise of 37.9% takes $9.10 to about $12.55, still under the $17.50 maximum for age 62, though the real ceiling rises with age. If the net amount at risk is still around $198,000 and the premium he pays no longer covers the charges, the account value starts to fall, which raises the net amount at risk and the charge together. That is how a modest-looking increase becomes a lapse a few years later.

For a cleaner view, ask the insurer for two in-force illustrations: one at the current premium, and one showing the premium needed to keep the policy in force to age 95 or 100 at current rates. The difference between the two is the cost of the change. The keep, surrender or sell your policy? helps if you are weighing keeping against giving up the policy.

When to ask the insurer

Call or write when any of these appear:

1. The effective rate is higher than the in-force illustration's current-rate column for the same year, with no notice on file.
2. The rate rose by much more than the age-to-age pattern of earlier years.
3. The charges (line H) changed without a notice.
4. The statement cannot be reconciled, even after you ask for the monthly detail.
5. The guaranteed-values column of the illustration shows the policy running out of money while you are still likely to be alive.

Put your request in writing and ask specific questions. Useful ones are: What was the current cost of insurance rate for each of the last four years, per $1,000, by attained age? Was the rate changed at the anniversary, and what notice was sent? What is the basis for current rates under section [number] of the contract? Does the change apply to my rate class, my issue year or my face amount band only? What premium keeps the policy in force to age 100 at today's rates?

An insurer is entitled to explain its answer, and many increases follow the contract. What you are building is a written record of what you were told. The step-by-step approach in how cost-of-insurance disputes begin in the contract language shows how disputes over this language begin.

When to look beyond the insurer

Some situations call for more than a phone call.

• An independent review. A fee-only planner or an insurance consultant who does not sell policies can read the contract language, run the illustration at several assumptions and tell you what a reasonable reading of the rate clause is. They charge for their time and are not paid by a sale.
• An actuary. If the policy is large, a trust owns it, or a series of policies is involved, an actuarial review of the mortality and expense basis can be worth the fee. It is unusual for a household with a single small policy.
• The state insurance department. It accepts complaints about rate increases and notice failures, and can ask the insurer to respond in writing. Rules on filing and notice differ by state. See state insurance departments: what they do for you for what a department does.
• An attorney. If the numbers point to a charge the contract does not allow, or a settlement notice arrives that mentions your policy, a lawyer is the one who can tell you whether to join, object or opt out. when to hire a life insurance lawyer explains how those engagements usually work. The guide on cost-of-insurance lawsuits against life insurers: cases and outcomes lists documented cases, and the outcome of any case depends on the contract wording in that case.

Keeping the worksheet going

Charge creep rarely announces itself. The best use of this worksheet is as an annual habit. Each year, add a column, record the same numbers, compute the rate per $1,000 and compare with the in-force illustration. After three or four years you have a trend that makes any step obvious, and you have the paper trail a regulator or a lawyer will ask for first. The companion checklist in a universal life annual statement checklist: ten things to verify covers items outside the arithmetic, such as loan balances and the grace period.

Key takeaways

• The effective cost per $1,000 of net amount at risk, computed from the annual statement, strips out the effects of aging and a changing account value and lets you compare years fairly.
• A rate that matches the insurer's projection for years and then steps up suggests a change in current rates; whether it was allowed is a contract question, not an arithmetic one.
• Compare the current rate with the contract's guaranteed maximum to see how much room remains, and ask for the guaranteed-values projection to see the worst case.
• Separate the cost of insurance from other deductions; a rising administrative charge or new rider charge raises a different question.
• Ask the insurer in writing, then use an independent reviewer, the state insurance department or an attorney depending on what the numbers show.