Universal Life (UL) 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. Originally, UL policies were front-end loaded, but now most policies are issued with little or no front-end load. In other words, the insurer credits the policyowner’s entire premium to the cash value. In lieu of front-end loads, companies assess a surrender charge that generally declines with longer durations. Surrender charges often start declining yearly after about the fifth policy year or sooner and reach zero in from seven to fifteen years. As a result of competition in the industry the trend has been towards starting the phase-out of surrender charges sooner and more quickly.
Policyowners can determine the surrender charge explicitly by looking at the policy illustration or ledger statement. This statement shows both a cash value figure and a net cash value figure for each policy year. The cash value is the amount on which the insurer bases interest credits. The net cash value is the amount that the company would pay if the owner surrendered the policy. The difference is the surrender charge.
Commissions paid to agents depend on the size and timing of premium payments and how the insurer/policyowner initially configures the policy. Commissions typically range from 20 to 55 percent (or higher) of the first-year premium for premium amounts up to the target level premium. The target level premium generally is the level annual premium the policyowner would have to pay if the policy was configured as a level premium whole life policy. The commission on the portion of any premium payment that is in excess of the target level premium is lower, often about 3 to 8 percent. Commissions on subsequent premiums are usually lower. Total initial and renewal commissions generally equal about one year’s target level premium if the original plan of insurance remains the same.
Insurers may recoup policy issue expenses and commissions in a number of ways including a flat policy assessment charge, a percentage of premium charge, a fee based on each $1,000 of face amount, or some combination of each. The trend has been towards lower policy assessment charges and level percentage of premium charges. Many insurers now charge about $25 to $50 per year plus 2½ percent to 20 percent of each premium. The percentage of premium charge generally is lower for higher premium, higher death benefit policies than for lower premium, lower death benefit policies.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM