Breakdown of Universal Life Insurance Costs

The versatility and openness of universal life insurance’s costs define it. We can readily pull up the expense breakdown of universal life insurance policies and see exactly where the money goes, unlike whole life insurance, where expenses function under the cover of confidential information.

Expenses for universal life insurance policies can be divided into four groups:

High-end load

Policy Charge

Every 1,000 Charge

The Price of Insurance

A fee for the selected investment account or accounts will also be charged for variable universal life insurance plans.

High-end Load

Since premium load frequently generates the most confusion, that is where I want to start. Every premium that the policy owner pays into the universal life insurance policy is deducted for this cost. It varies from business to business and even product to product, but as a general rule of thumb, 5–10% is about average.

This cost “comes off the top,” which means it is imposed before to the funds entering the policy. The insurance company will take $700 out of your $10,000 payment and credit $9,300 to your policy, for instance, if you pay a $10,000 premium and your policy has a 7% premium load.

When examining an expense breakdown of a universal life insurance policy, many consumers miss something subtle about this cost. You do not pay a premium load if you do not pay a premium for your insurance. I bring this up since many people just consider their spending as a whole. This has nothing intrinsically wrong with it. However, the premium burden isn’t really relevant when comparing the costs of a universal life insurance policy to the idea of how the costs are balanced against my cash worth. The premium load cannot cause a universal life insurance policy to lapse because it is not a continuing expense without a premium payment and because it is solely dependent on the actual payment of a premium. The premium load expense disappears if the policyholder chooses to cease paying premiums—something they are allowed to do with universal life insurance at any time and for any reason.

Policy Charge

Every insurance policy has an annual fee assessed against it. Usually, this cost falls between the $50 to $100 range. The fee pays for operational and administrative costs like keeping up a web site that allows policyholders can access policy values and printing and mailing an annual statement to policyholders. This is an annual cost that will never be waived. Additionally, this charge is typically flat and is unaffected by the policy’s value as shown by the outstanding death benefit.

Every 1,000 Charge

For the first few years of the policy—typically the first ten or so years—universal life insurance policies have a terminal fee known as the per 1,000 charge. The purpose of this charge is to help insurance companies recoup the cost of obtaining the policyholder.

The cost is formulaic in nature and is determined by the net amount at risk, or the amount of death benefit that is still owed on the policy. That is to say, no insurance company has bothered to determine just how much it cost them to obtain you as a single policyholder. The idea behind this method is that everything averages out in the end, even though it may have cost more or less than this total.

As I previously stated, this expense is terminal and typically lasts ten years. This implies that the per-1,000 charge disappears after this period.

The per 1,000 charge is dependent on the policy’s death benefit, so altering the death benefit will also alter the per 1,000 charge. For instance, the per 1,000 charge will be lower if the death benefit is decreased while the charge is still in effect.

The Price of Insurance

Among the group, cost of insurance (COI) is arguably the most well-known item. It is the actual cost recognised by the insurance company for giving you the death benefit under your policy. The likelihood of dying grows with age, hence this cost increases over time. This ongoing cost is determined by the death benefit, more precisely the net amount at risk of the policy.

It is possible to adjust the Cost of Insurance fee to some extent based on the policyholder’s demands because it is linked to the death benefit, specifically the net amount at risk. This implies that by adjusting the death benefit, you can lower or raise the COI cost.

Particular Costs for Variable Universal Life Insurance

The cash value of variable insurance policies is invested in accounts that resemble mutual funds and fluctuate in value in tandem with the underlying market securities held by the fund. The management costs associated with these funds are likewise standard for mutual funds. As stated in the prospectus given to the policyholder at the time of purchase, these fees are deducted from the policy’s cash value on a regular basis.

These charges are determined by the fund’s account value. The actual fee paid depends on how many different funds the policyholder selects within the variable universal life insurance policy, as the price varies from fund to fund and most policies offer many fund selections.

The Surrender Fee: An Incidental Cost

Surrender charges are another prevalent feature of universal life insurance contracts. These are contingency delayed sales costs, meaning they only apply if a policy is cancelled within a certain time frame.

This means that surrender charges only apply if the triggering event—canceling the policy during the surrender period—occurs, as opposed to being subtracted from a universal life insurance like the other costs previously discussed.