Attention: Product Design Makes a Big Difference in the Fees You Pay
Broker’s Commission Fee
Shoreview LLC, dba/ Shoreview Insurance, earns a commission-type fee paid to it by the insurance company, typically during the initial few years of the policy, but sometimes spread over longer periods. The fee is calculated by a formula using some percentage of premiums paid by the policy owner during various time periods. (By the way, it is against the law for an insurance producer like Shoreview Insurance to offer a discount to, or to share a commission with, the purchaser of an insurance product.)
Clearly, it is you, the policy purchaser, who ultimately pays a broker’s commission fee. But, depending on how it designs a policy for a client, an insurance broker/producer/advisor can help the client get more for the money, that is, pay less for a better financial result. A good advisor, like Shoreview Insurance, always puts the client first. As a result, Shoreview Insurance might get paid a significantly smaller commission, but the client ends up in a financially stronger position. That’s OK; commissions are always good enough; greed is unnecessary.
Insurance Fees You Pay
Life Insurance and annuity policies famously include fees. A well-designed policy (i.e., a policy designed in the best interests of the consumer) minimizes fees. Lower fees not only reduce your overall costs, but just as importantly, low fees make indexed life insurance policies more robust (i.e., able to withstand a few years of zero crediting).
Fees charged in an indexed universal life (UIL) insurance policy, for example, generally include (i) the cost of insurance (COI), (ii) premium loading fees, and (iii) expense charges (administrative fees, etc.). The total amount of fees paid by a policy owner over the life of a policy is influenced not only by the selection of a particular policy issued by a particular company, but also how the policy is designed. For example, all other things being equal, a life insurance policy designed with an increasing death benefit has lower total costs than a policy having level death benefit.
Premium-loading fees (a percentage of premium paid into the policy) are paid annually as long as premiums are paid into a policy. These fees go away when no more premiums are paid. The bulk of policy expense charges also go away at some point, usually after about 10 years. The cost-of-insurance continues for the life of the policy as long as there is a net amount at risk (NOR), which is the difference between the value of the death benefit (DB) and the cash value (CV) in the policy.
NOR = DB – CV
In a well-designed and well-managed policy, cash value increases over time; therefore, the net amount at risk decreases. Thus, even though the COI per unit NOR generally increases as the age of the insured increases, the actual total COI generally decreases.
As suggested above, expenses in a life insurance policy are “front-loaded”, that is, paid during the initial years of a policy. When a policy is in force over several decades, which is the idea in most cases, the overall total policy expenses of UIL are typically considerably less than total management costs in a managed investment account over the same time period.
One way to view policy expenses is that they are the price of obtaining the tax benefits of life insurance, that is, tax-free growth and distribution. But do not forget that life insurance also provides a death benefit starting in year 1. If the owner of a conventional stock investment account were to die in year 1, the “death benefit” would basically be the starting account value. In sharp contrast, the beneficiary of the life insurance policy would receive the full, substantial death benefit. This is the huge leverage that no conventional stock account can match.
Another consideration is that some insurance carriers have designed products that look very good at first glance. Closer analysis, however, often reveals that the supposed benefits and/or bonuses in these policies are possible only through very high policy expenses, or by shifting risk to you, the policy owner. Not all that glitters is gold.