Fees and charges on variable products tend to be somewhat higher than on traditional products because of the additional expenses of registering the contracts with the Securities and Exchange Commission and the additional administration, record keeping, and reporting responsibilities associated with the products. In contrast with traditional life products, the securities laws require extensive disclosure of fees and charges in the offering prospectus. VL and VUL policies have two broad classes of fees—charges to the policy and charges to the cash value account. Because of differences in the way insurers handle premiums and face amounts in VL and VUL policies, some of these fees and charges are treated differently in each type of policy.
Charges to VL Policies
Charges to VL policies include sales loads, a one-time policy fee, annual administration charges, a state premium tax charge, a risk charge and, in some cases, switching fees.
Most companies levy sales loads (principally to pay commissions) in the first year of not more than 30 percent of the premium. The percentage generally is lower on higher-premium limited-pay policies than on lifetime pay policies. The sales load on premiums in the subsequent years typically grades down from a maximum of 10 percent in the second year to 7.5 percent or lower in later years. In general, SEC rules prohibit aggregate fees and charges from exceeding a reasonable amount in relation to the services provided and the risks assumed.
Policy fees generally range from $3 to $10 per $1,000 of guaranteed face amount. Annual administrative charges typically range from $5 to $70, often with a higher charge in the first year and lower charges in subsequent years. The premium tax charge varies by state but is usually about 2 to 2½ percent of each premium. Risk charges, which the companies assess to compensate for the risk that the insured may die when the death benefits are below the guaranteed amount, often are specified as a percentage of the premium, ranging from 1 to 3 percent. Alternatively, some companies compute the risk charge as a dollar amount per $1,000 of guaranteed face amount with charges generally ranging from $0.50 to $1.50 per thousand of face amount. Most companies permit one or more switches or transfers of money among the various accounts each year without fees. Insurers generally permit additional switches but the company usually charges from $5 to $30 for this service.
Charges to the VL Cash Value Accounts
Charges to the cash value account include the cost of insurance (mortality charges), mortality and risk expense, and investment management fees and expenses.
Mortality charges are based on the company’s current mortality rate as applied to the net amount at risk (the difference between the death benefit and the cash value). Current mortality rates will vary depending on the company’s experience but the companies guarantee they will not exceed certain maximums at each age as specified in the contract. The mortality and risk expense charge is taken against each account within a policy for the risk that the insureds as a group will live for a shorter period of time than estimated and the risk that the administrative expenses will be greater than estimated. This charge usually ranges from 0.1 to 0.9 percent of the assets in the account. Management fees and expenses vary by the type of fund and the investment activity within the fund and are similar to those fees and expenses associated with mutual funds. For instance, money market funds, bond funds, and stock index funds have lower management fees and expenses than general stock funds, which also have lower fees and expenses than real estate funds and foreign stock and bond funds. Management fees typically range from 0.25 to 2 percent of the assets in the fund. Expenses, expressed as a percent of assets in the fund, similarly range from about 0.25 to 2 percent.
Charges to VUL Policies
Policy and account charges on VUL policies are similar to those on VL policies with the exception of the sales loads. Similar to regular universal life, VUL policies charge front-end and/or back-end loads or surrender charges to recoup commissions paid to the selling agent and the expense of issuing the policy. Most companies levy a surrender charge of up to 25 percent if policyowners withdraw money in the first year. The surrender charge generally declines in later years. Surrender charges often start declining yearly after about the fifth policy year or sooner and reach zero in from ten to twenty years. As a result of competition in the industry, the trend has been towards starting the phaseout of surrender charges sooner and more quickly.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM