The sales commission is generally about 3 to 10 percent on these products. In addition, the insurance company typically pays a state premium tax of about 2½ percent. However, these fees generally are taken into account when the company quotes the short-term guaranteed net rate that it will credit to the policy in the first or first few years. For example, to help recover up-front costs, most policies might be subject to a surrender charge, say 8 percent, in the first year with the charge typically declining each year thereafter by 1 percent until it reaches 0 percent after the eighth policy year. When companies assess surrender charges, they can afford to apply the entire premium to the cash value.
In current assumption policies, the interest the insurer credits to the policy each year is usually net of mortality charges and expenses. In ordinary life policies, the dividends reflect the mortality, investment, and expense experience and, therefore, the amount of the paid-up additions that the insurer credits to the policy.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM