Policy charges

In an indexed universal life (IUL) policy each charge is a separate deduction from the premium or the cash value, set out in the contract and shown on the illustration and statements. Charges are front-loaded, so a policy closed in its first years returns less than was paid in, whatever the index did.

The charges, one by one

• Premium charge (premium load). A percentage deducted from each premium before it reaches the cash value, also known as the premium expense charge. Many contracts set one rate on premium up to the target premium and a different rate above it.
• Premium-based taxes. Where tax is levied on premiums, the insurer recovers it, often within the premium charge. For a US insurer this can include a charge for the federal deferred acquisition cost (DAC) tax: section 848 of the Internal Revenue Code makes the insurer capitalise expenses of up to 9.2% of net premiums on individual life contracts and deduct them over 15 years, which brings its tax forward.
• Policy fee. A fixed monthly or annual amount for maintaining the policy, whatever the cover.
• Per-1,000 charges. A monthly charge for each 1,000 of face amount, also called a face amount charge or monthly expense charge per 1,000. On many contracts it applies for a set number of years from the start of the policy, or from an increase in cover.
• Administration charges. Charges for managing the policy, either a fixed amount or a percentage of the cash value. A charge set as a percentage of the account value is also called a percent-of-fund charge.
• Cost of insurance. The monthly price of the life cover. The cost of insurance is charged on the death benefit less the cash value.
• Index strategy charges. An extra charge on some indexed accounts, such as those with a multiplier.
• Rider charges. For optional benefits such as critical illness cover.
• Surrender charges. On a surrender or withdrawal during the surrender charge period, typically the first 10 to 15 years.

In practice

Premium charges come off each premium as it arrives; the other charges come off the cash value each month, before index credits are added at the end of each segment. The cash value can therefore fall in a flat year even though the 0% floor prevents a negative credit. The illustration shows the charges on current rates and on the maximum rates the contract allows, and the insurer can change some charges within those maximums.

In an international IUL

Each insurer sets its own charges, and the illustration for a specific policy shows them. In a well-funded policy a high proportion of each premium reaches the cash value from year one, and fixed and per-1,000 charges weigh less against the larger balance. Several charges are heaviest in the early years, so Capital for Life reads the account value column of an illustration rather than the net cash surrender value.

In a PPLI structure

A PPLI structure usually carries an initial charge and an ongoing charge, a percentage of the portfolio each year that is often tiered by premium size, plus the cost of insurance on the insurance element. Where a charge for the US DAC tax applies, it can form part of the initial charge. Variable life policies and some PPLI structures carry a mortality and expense (M&E) risk charge, a percentage of the account value. The investment manager and custodian charge their own fees within the portfolio.

Common questions

What is a premium load in IUL?

A premium load is the premium charge: a percentage taken from each premium before the rest is added to the cash value. It covers the insurer's costs on premium received, including any tax on premiums.

What are per-1,000 charges?

A monthly charge for each 1,000 of face amount. With illustrative figures, US$0.10 per 1,000 a month on US$1,000,000 of cover is US$100 a month.

Go deeper: IUL charges and risks and how a PPLI structure works.