If you’re looking for a type of insurance that offers more freedom and considerable upside potential, you should consider indexed universal life insurance (IUL). This type of coverage gives you a chance to experience the upsides of the stock market without the risk when the markets go down.
To make understanding IUL fees easier, we have a calculator that gives the fees in the form of a percentage. Much like your brokerage accounts, fees are shown as a percentage.
We can run these numbers for you before you decide on which IUL company to go with.
In this article, we’ll discuss fees that are part of every life insurance policy with a cash component.
How will IUL Fees Impact My Policy?
This question should always be asked if you are considering Indexed Universal Life Insurance. Oftentimes, brokers who are obsessed with selling you an IUL talk about rainbows and fairy dust and somehow leave out the part about the fee snake slithering around in your policy.
Without getting too far out in the weeds, let’s take a look at IUL fees and how they will impact your policy’s cash account but first, you need to understand that the amount of fees you’ll pay varies between different IUL companies. Understanding these fees and how an insurer you are considering charges them should be in the top 3 questions you fire at an insurance professional. The fee expenses you’ll bear will fall into two categories:
Fixed Expenses
Fixed expenses are predicated on the policy you purchase and the insurer you purchase it from and will not change over the life of your policy:
- The Premium Load – The premium load is taken right off the top of your premium payment and is used by the insurer to cover things like premium taxes and the insurer’s profitability. The premium load will usually go away after the 10th year.
- Policy Administration Fee – This fee pays for the administration of your IUL and will exist over the life of your policy.
Variable (fluctuating) Expenses
As the term states, variable expenses are made up of three components and will fluctuate over the life of your IUL policy:
- Policy Expenses – Your policy expense charge is generally spread out over the first 10 years of your policy’s existence. These charges are used by the insurer to cover things like underwriting costs, agent commissions, and acquisition costs (the money spent to entice you to become a policyholder.
- Mortality Expenses – Mortality charges is the money spent to process and then pay the benefit to the designated beneficiary(s)
- Surrender Charges – The surrender charge represents the money an insurer has invested in underwriting, issuing, and managing your policy. This charge only applies if you walk away from your IUL policy early on. Typically, surrender charges are spread out over the first 10 years of the policy on a declining basis and then go away. This means if you want to cancel and cash out of your policy in the 6th year, your surrender charge will be deducted from the cash settlement.
Understanding how expense fees will impact your cash accumulation is critical if your intentions are to create an income stream for retirement using your IUL. Additionally, it kind of dispels the notion that you cannot lose money in a down market because of the 0% floor rate. Although your cash account isn’t negatively impacted by a down market, your fees are still deducted from your account.
Benefits and Drawbacks of IUL Fees
Understanding both the benefits and drawbacks of IUL fees can help you make a more informed decision about your policy.
Benefits of IUL Fees
- Coverage Flexibility: Despite the fees, IUL policies offer flexibility in premium payments and death benefit amounts, allowing you to adjust your policy to fit changing financial circumstances.
- Market Upside Potential: IUL fees are a tradeoff for accessing market-linked returns, which can provide growth without the downside risk associated with direct stock market investments.
Drawbacks of IUL Fees
- Potential to Erode Cash Value: High fees, particularly during the early years of the policy, can reduce the cash accumulation over time, especially in low-interest or underperforming years.
- Complexity: IUL policies can be difficult to understand, and navigating the fee structure requires careful analysis. Without a deep understanding of how fees are applied, policyholders might not maximize the policy’s potential benefits.
Conclusion
Understanding IUL fees is crucial to ensuring that your policy works for you. By learning how these fees operate, you can better manage your IUL to generate income and protect your financial future. If you have questions or need personalized advice, feel free to reach out, and we can guide you to the best solution for your needs.
FAQs About IUL Fees
What are the most common fees in an IUL policy?
The most common fees include the premium load, policy administration fees, mortality expenses, and surrender charges. Each fee impacts your policy differently, and understanding each one can help you better manage your investment.
Can I reduce the fees on my IUL policy over time?
Some fees, like the premium load and policy expense charge, may decrease or disappear after a set number of years. Others, like policy administration fees, typically remain for the life of the policy.
How do IUL fees affect the cash value of my policy?
Even in a market with a 0% floor rate, fees are still deducted from your account, which can lower your cash value over time. It’s important to track how much is being deducted each year.
What is a surrender charge in an IUL, and how does it work?
The surrender charge is a fee imposed if you cancel your policy within the first few years. It compensates the insurer for the upfront costs of issuing your policy and usually declines over time, disappearing after about 10 years.
Are IUL fees tax-deductible?
Generally, IUL fees are not tax-deductible. However, any gains or income from the policy might enjoy tax advantages, depending on how the policy is used.
