Understanding the Costs of Universal Life Insurance: A Breakdown of Expenses
Universal life insurance (ULI) is known for its flexibility, but with that flexibility comes a complex cost structure that can be challenging to navigate. Unlike whole life insurance, where many of the costs are somewhat hidden within the policy, universal life insurance provides a more transparent view of where the money goes. Below is a breakdown of the main cost components of universal life insurance policies and an explanation of each.
1. High-End Load
One of the most significant and often confusing costs in universal life insurance policies is the premium load. This is a charge that is deducted from each premium you pay before any money is applied to the policy’s cash value. The premium load varies by insurance company and policy type but typically ranges between 5% and 10% of the premium.
For example, if you pay a $10,000 premium and the policy has a 7% load, the insurance company will take $700 off the top, and $9,300 will be credited to the policy.
It’s important to note that this expense only applies when premiums are paid. If you decide to stop making premium payments, there will be no premium load. This distinction is crucial when evaluating how the costs impact the growth of the policy’s cash value. The premium load expense disappears when there is no premium being paid, which can happen at any time with universal life insurance.
2. Policy Charge
This is a flat annual fee that all universal life insurance policies charge, typically ranging from $50 to $100. The policy charge covers the operational and administrative costs of maintaining the policy, including:
- Managing the policyholder’s online account
- Sending out annual statements
- Customer service
This charge is consistent every year and does not vary based on the policy’s value or the outstanding death benefit. Unlike the premium load, the policy charge is a recurring cost that must be paid as long as the policy is in force.
3. Every 1,000 Charge
The per $1,000 charge is an initial cost associated with the policy’s death benefit. This charge is common in the first 10 years of the policy, though it may last longer in some cases. Its purpose is to help the insurer recover the costs of issuing the policy, including underwriting and initial acquisition expenses.
The per 1,000 charge is calculated based on the net amount at risk, which refers to the remaining death benefit that the insurance company would need to pay out in the event of your death. As the death benefit decreases, so does the per 1,000 charge.
For instance, if your policy has a death benefit of $500,000 and the per 1,000 charge is $4, you would be paying $2,000 annually for this specific charge in the first few years.
4. Cost of Insurance (COI)
The cost of insurance is one of the most significant and well-known charges in universal life insurance policies. It represents the actual cost that the insurer incurs to provide the death benefit. This cost increases as you age because the risk of death rises over time. The COI is tied to the net amount at risk (the portion of the death benefit that exceeds the policy’s cash value), and as this risk grows, so too does the COI.
The COI can be adjusted to some extent based on the policyholder’s preferences. For example, by adjusting the death benefit, you can lower or increase the COI. However, keep in mind that increasing the death benefit will also raise the cost of insurance, potentially reducing the policy’s cash value growth.
5. Fees for Variable Universal Life Insurance (VUL)
In the case of Variable Universal Life Insurance (VUL), the policy’s cash value is invested in underlying investment accounts, which behave similarly to mutual funds. These investment accounts carry management fees, which are typically listed in the prospectus provided to policyholders at the time of purchase.
The fees vary based on the specific fund(s) selected by the policyholder, and the more funds you select, the higher the total management costs will be. These fees are deducted from the cash value of the policy on a regular basis.
6. Surrender Charges: A Contingent Cost
Surrender charges are another cost that applies to universal life insurance policies, but only if the policy is canceled during a specific time period, known as the “surrender period.”
Surrender charges are typically applied in the early years of the policy and decrease over time. If you cancel your policy during the surrender period, you may face a significant fee. However, if you hold the policy long enough, these charges will eventually disappear. The key point here is that surrender charges are contingent—they are only incurred if you decide to cancel the policy.
