All the FEES for Cash Value Life Insurance Explained

Hey, it's Matthew Decker with Cash Value Life Insurance Reviews and Leverage Wealth Management. Today, we are going to be talking about fees associated with cash value life insurance, specifically indexed universal life. So this conversation is going to be a little bit different than maybe you would normally get when talking about fees associated with life insurance. We take a relatively unique view about how fees will impact your policy. So the first thing that I want to share with you, and I'll share my screen here, is not all the fees are the same. So what we're looking at here is just a fee ledger, and this doesn't have really all the fees that you might see on a policy, but it's got a lot of the main ones. So we have a premium expense charge. This is going to be a flat fee based on the premium that you're paying. So every time you pay a premium, you pay a percentage of the premium as a premium expense charge. And you'll see like in this policy, the premium doesn't change, but the way that this contract is written, the fee or the premium expense charge actually drops off in year 11. So it goes from $900 on the $10,000 premium to $500 in the 11th year on the same $10,000 premium. And so not every company does it that way, but a lot of them will. We've also got our cost of insurance and our expense charge. So cost of insurance is just the yearly fee to pay for the insurance. That's the annually renewable term costs that you're going to see go up over time, and you can see that happening. The expense charge is, again, not the same for every company, but it's typically going to be a flat charge for a set amount of years. You'll notice this company has a flat charge for the first 10 years, then it grades down for the next five, it grades down again for it looks like life here. This is going to continue to play out. Not every policy is that way, but you should know that this expense charge is going to be fixed. It's going to be what it's going to be. It's not a variable charge like the cost of insurance charge that's going to fluctuate with your age and with the amount of insurance that you're actually purchasing. And we also have rider charges here. You'll notice there are no rider charges on this particular policy. And what's not included on this ledger from a fee standpoint, you may have a policy that has an asset-based charge or an asset fee. We'll look at one of those in a second. I suppose you might see an admin fee, but that'll typically be $150 or less per year. But for the most part, those are the fees. So now that we know what the fees are, probably the second most important thing to understand is which of these fees are actually set in stone and which of the fees have the potential to change. And if they can change, how can they change? So let's just go ahead and get rid of all this. We'll stay on the same ledger and talk about it. So in terms of the fees that are relatively speaking locked in, most of the companies are going to have a locked in premium expense charge, meaning you know what the load's going to be or the premium expense charge, however they word it. You know what it's going to be. It's going to be a percentage of the premium that you pay, and it's not going to change. The expense charge or the per face fee or the per unit charge, that's what this is. This fee here, this expense charge is set based on the starting death benefit. If you go in and change the death benefit later, this fee stays the same. This is the reason that we say setting these policies up right from the jump is probably the most important thing that you can do because one of the biggest fees on this policy is that expense charge. And if it's based on the starting death benefit and it doesn't change, even if you reduce the death benefit later, it just goes to show you why it's so important to do this right from the beginning. So we'll say the expense charge also locked in. And then your cost of insurance. It's not locked in, but in order for your cost of insurance to change, the company's going to have to prove what's called adverse mortality. They have to go to their state insurance commissioner. They have to appeal to their state insurance commissioner to increase the fees. And in order to do that, they have to actually prove that they've, I'm going to boil this down. They followed all the rules. They've used good actuarial tables. They're not cutting any corners. They just had more people experience an adverse event than what kind of the actuaries said they should. It's a statistical anomaly is essentially what they have to prove. And even then the state insurance commissioner, there are upper limit caps on how much cost of insurance can change. And it's probably less than you might think. So that leaves us with really just the rider charges. And here's the most important thing that I want to make sure everybody that's watching this understands. And that is that your rider charges are not set in stone. And in most cases, there's virtually no guardrails on fee increases as it relates to rider charges. And some of you may have seen this either for yourself or your loved ones, if you've dealt with long-term care policies. So personally, I've seen this. My parents received a premium increase notice on their long-term care policy, and it was North of a hundred percent premium increase because their rider charge, they had an inflation rider on their long-term care policy, that rider charge, and that's how it shows up as a rider charge with no fee increase guardrails, the company decided to increase that rider charge by about 200%. And it resulted in a doubling a hundred percent increase in their total premium, or they could cancel the rider and have a policy that's worse. So you just need to understand if you have a policy that has big rider charges, it's a high likelihood that those rider charges are not locked in. And if a company does get into trouble or they experience some issues with profitability, the rider charges will most likely be the first thing that experiences a drastic fee increase. We've already seen that on long-term care policies. So those are the fees that are kind of set in stone. That's the one fee, the major one that really has some variability and there's no real cost controls for you. But I also want to touch on, we've talked about different types of fees. Anything that you would see besides what we've just talked about, premium expense, cost of insurance, per unit charge, per face fee, expense charge, that's all the same thing. Rider charges are what they are, but anything over and above that, you should be wary of those fees because why are they there? So let me give you a couple examples. First example I want to give you is called an indexed account monthly charge. It's also called an IAMC charge. There's one company in the industry that sells indexed universal life insurance policies that has this IAMC charge and they're the only company that does this. It shows up as an additional charge and so you just need to understand that it's there and maybe look at it with a critical eye. We'll read it together. IAMC, a charge we deduct from each index account on each monthly policy date up to the insurance age 121. What is that? It's just another fee that they tack onto the policy to essentially boost the caps. And if you have 10 policies to choose from and one policy has an additional fee to support their caps, I would be critical of something like that. This is another policy where they tack on an asset-based charge. Now, asset-based charges don't have to be terrible, but in this particular example, I'm not a huge fan of this asset-based charge. It's an issue as you'll see. So years two through 20, the annualized rider charge on this particular policy is seven and a half percent on this option C, which in the past would actually make the illustration look the best. So you have the option and a lot of agents will do this because again, in the past it would make this policy look better on paper. They would add a rider that comes with a seven and a half percent asset-based fee for 20 years. Seven and a half percent every single year for the first 20 years, which means if you get a zero percent return, you're not just going backwards by the cost of the insurance and the premium load. You're going backwards by all of those things plus a negative seven and a half percent, and then it grades down to 6.6, 5.7, 4.8, 3.9, and eventually it lands at three and you're 25 plus. But that's what it is today. It's actually not guaranteed to be that. It can actually go up. This particular charge is tied to a bonus. The bonus is also not guaranteed. Anytime you see some kind of rider or bonus that comes with a fee or a charge, you want to make sure two things. Number one, you want to make sure that the charge is guaranteed. And number two, you want to make sure that the bonus that you're paying for is also guaranteed. Why are we highlighting this one? Because it's an extremely expensive charge, seven and a half percent. It's not guaranteed and the bonus that you receive is also not guaranteed. We would be super, super concerned with customers getting into a policy like this because it's almost impossible to predict and it's an additional fee in the absence of real concrete value. I talked about those rider charges and how they're not set in stone. I have two samples here that we can look at to kind of show you what I'm talking about. This first one that we have here on the left, this is a rider charge that essentially shows what a term rider might look like if you added it to an indexed universal life insurance policy. So this is just the fee, the rider charge for the term insurance rider added to a policy. I'm showing you this because most people when they add a term rider, they're going to think that the fee for the term rider is going to show up as their cost of insurance because that's what it is. It's insurance. But a term rider actually shows up as a rider charge, which is important because if it's a rider charge, it means any term that you have on the policy doesn't have cost controls on it. They can change this at any time for any reason just if they decide that they want to. And so if a company does experience some kind of profitability issue, rider charges are going to be the first thing to go. And in this case, you'll see that this term rider charge over 10 to 20 years is costing around $40,000. And that 38 could be double or triple that if they decide to change the fee and they can do it without consulting anyone else. So just be concerned with that. If we use term insurance on a policy, we want to make sure that we can at least peel that term insurance off at some point. And that would be in the first 10 years. The other thing that we have here on the screen is a rider charge for a long-term care rider. And so a long-term care rider is going to show up quite a bit different. It's just a flat fee like this one is for a set amount of time. But again, same thing here. If you're buying a policy for cash growth and income potential, why tack on a long-term care rider that's going to come with a fixed charge that's not going to have any type of cost guardrails in place? I think that you're setting yourself up to be disappointed if that company gets into a situation where they start increasing fees on long-term care term riders, so on and so forth. So you just have to understand if you have a policy, this is how your rider charges are going to look. There'll be a column, it'll say rider charges, and you'll want to know what's there because those fees are not going to be set in stone. So we do this a lot and we talk a lot about fees with clients. And we do get a lot of people come to us and ask us questions or maybe they'll say, hey, I want the cheapest policy or the policy with the lowest fees. And while I certainly understand where that question is coming from, nobody wants to pay fees if they don't have to. The last thing we want to do is pay excess fees and not receive anything of value in return. So paying fees isn't necessarily the worst thing in the world if you're getting something back in return. And so what I thought I would do, I thought this would be interesting. You can tell me if it's interesting. I went ahead and I grabbed five different companies and I said, all right, let's total, let's structure the policy the same way with five different companies and let's total up the fees for the first, what would we say, 20 years? 20 years of fees, five different policies. It's the exact same policy with five different companies and let's compare the total fees and let's compare it to maybe their caps and let's just see what we find out. So that's what we've done here. We've got our total charges after 20 years. We've got Carrier A, B, C, D, and E. And it doesn't matter which company this is. If you ask us, we're not going to tell you because I don't even know if, I don't even know what carrier it is at this point. I had Brady in our office do it because it doesn't matter what carrier it is. So Carrier A, total fees after 20 years, $87,000. That's the highest one on the list. The next highest would be Carrier E, $83,000. Then we've got Carrier C at 72, D at 65, B at 40. So on the face of it, I mean, this is crazy. We've got five companies here. This is the exact same policy five different times. And two of these policies are more than double the fees of the smallest policy. And on the face of it, you would say, well, I want the policy with the smallest fees. And it looks like in this case, that would probably be accurate. But what's interesting here is let's look at their caps. So Carrier A has the highest fees for 20 years. And it just so happens to have one of the lowest S&P caps, eight and a quarter. So if I were looking at this and I don't want to pay fees in the absence of value, I would say, man, when I compare Carrier A to Carrier E, the fees are close. Let's get rid of some of this. So if I'm just making the decision based on the fees, maybe it's a difficult decision to make 87 versus 83. But I can pay $83,000 in fees and get a 12% cap with Carrier E or an eight and a quarter cap with Carrier A. So when I look at this, I say, okay, Carrier A is absolutely charging excess fees without giving me any value in return. Carrier C and Carrier D are kind of in the same boat. And the reason I would say that is simply because they too have an 8% cap. Those are the two lowest caps on the board, but all of them are dragging behind Carrier B by a huge margin. I'm paying $40,000 in fees and I'm getting a 10% cap. So again, I don't know, well, now I know which companies these are because I'm looking at them and I know what the caps are. But if I'm comparing these five contracts, it's a pretty easy choice and it's between probably E and B. And you might say, well, man, why would you pay twice the fee? Well, I guess it depends on how does that 12% cap compared to a 10% cap? How much more am I realizing in potential gains? And that would be something that we'd actually have to analyze by looking at the illustrations. We can't do it just by looking at this, but I just want you to see when it comes to fees, sometimes the carrier with the lowest fee, in this case, Carrier B is providing you maybe the best value there. But what we really care about when it comes to index universal life insurance policies and fees are paying the lowest amount of fees for the most value that we can get. What we really want to avoid is paying a lot of fees for no value in return. And a lot of times it's just not quite as easy as looking at the total fees and comparing policy A to policy B, because there's a lot of variables that go into this. We would need to know if we wanted to do a full comparison here, which we don't, that's not the purpose of this video. We would look at all of these different companies and we'd say, okay, well, but what are the loan provisions? What are the different crediting methods that are available? What's the financial stability of the different policies? So on and so forth. But just as a recap, when it comes to fees associated with index universal life insurance policies, when you look at that fee ledger, there's going to be certain fees that are for the most part set in stone. There's going to be other fees like your cost of insurance that can change, but it's hard to change. And then there's going to be other fees where they can change and they can change on a whim and they can change without any cost control. That's your rider charges. And then there's even more fees where you probably don't want to go there. And that would be paying for a bonus where the fee's not guaranteed, the bonus isn't guaranteed, or it's a fee that that company's the only one who charges it like that index account monthly charge. But if you're looking at an index universal life insurance policy or a policy that's just a cash value life insurance policy, and you're trying to gear it towards cash accumulation and potential income in the future, and you want a second pair of eyes to look at it, or you want an expert in this field to take a look at the policy, listen to you and your goals and what you're trying to accomplish and come up with the best solution for you, I would encourage you to book a call with us. You can do that by clicking on the link right here. It'll take you to our website where we ask you just a few questions about what your goals are, who you are, and then it gives you an opportunity to book some time with us and kind of give us the download on what you're trying to do, what you're trying to achieve, and if we can help you, we would love to. So this has been Matt Decker, Leverage Wealth Management and Cash Value Life Insurance Reviews. Until next time.