CHARGES, CHARGES AND MORE CHARGES
Welcome back to LiST’s life insurance blog.
Last week we discussed how the cash value of the policy grows, by paying premiums, and earning, either through interest or investment funds. This week we will delve into the other side of the coin that agents like to discuss less- what are the costs in a policy?
The policy costs are not always easy to spot. Sometimes they are included in the policy illustration, but other times must be deduced from the information that we have at hand. Just like the interest that we discussed last week, policy costs can usually be divided into guaranteed (the highest the carrier can charge) and non-guaranteed, usually referred to as “current costs”.
Some carriers have unique costs, but we will try to cover the basic ones that usually show up:
- Administrative costs-these are monthly costs that are meant to cover the administration of the policy.
Certain carriers (like John Hancock) usually include these costs in the illustration, like this:
Others, like Mass Mutual, generally do not include this information in their illustrations. Sometimes this information appears in the annual statement, like this:
Here we can see that the monthly admin fee is $8.
Very rarely, you may come upon a policy with zero admin fees (usually older policies).
- Premium load rate or premium charge-this is a “front end” load used to cover policy expenses, including the agent’s fee. Sometimes this load will also cover the carrier’s state tax obligations (that are calculated per premium payment- don’t ask), although other carriers charge this “premium tax” separately.
Like its admin rate cousin, sometimes the load rate appears straight out in illustrations (some John Hancock policies, a lot of Voya Financials, Pacific etc), like this:
Other times, we can deduce the rate from the illustration, or from the annual statement, like this:
By dividing 1,598 by 31,963 (again, basic arithmetic), we can see that the premium load rate here is 5%.
The premium load rate varies between different carriers and policies, and is usually between 3-18%, although it can be as low as zero and as high as 30%.
Other charges that show up occasionally are mortality and expense charges, face amount charges and certain rider charges.
The last, and most complicated charge is the cost of insurance “COI”, which is the actual insurance cost. We will discuss this on next week’s blog.
Try to locate the admin costs and premium load rate on the illustration or annual statement. Write this figure down, as it will be used in evaluating the policy.
Join us again next week for a detailed explanation of these documents.
Join us again next week!
The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. You should seek legal advice or other professional advice in relation to any particular matters you or your organization may have.