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Life Insurance Charges and Fees Explained

By Jim Sloan on May 26th, 2010
Life Insurance

When you purchase a life insurance policy, your premium and the cash value of the policy can be affected by a wide variety of fees and charges. These are often referred to as the "load" and some policies are considered "low-load" because the fees and commissions you pay are relatively low. Other life insurance policies might be considered "high load" because the commissions, administration fees and other charges can amount to quite a bit of money.

It pays, then, to become familiar with the policy charges and fees you may encounter before you buy a life insurance policy. It's also important to know how and when these expenses are charged--some are deducted from your premium payment and others are deducted from your policy value.

Insurance agents, brokers and other investment professionals earn their money three ways:

  1. Commission: Money paid to the agent for selling you the policy, which is usually calculated as a percentage of the premium
  2. Fee-based: When life insurance salespeople or brokers charge a flat fee for their services
  3. Fee plus commission: Occurs when you pay a fee to meet with an investment professional and a commission if you purchase a product they've recommended

According to the Insurance Information Institute (III), most agents and brokers are paid by commission but some also work on a fee basis. Find out how fees are charged before selecting an agent to work with.

The agent's commission is just the beginning of the fees and charges that go into a life insurance policy. Here's a breakdown of some additional charges you may come across:

  • Administration fees: The amount deducted from the policy to pay for the marketing, accounting and record-keeping expenses associated with your policy. Administration fees usually are deducted from your policy value once a month
  • Mortality and expense risk charges: This compensates the insurance company for the risk it assumes. For instance, there is a risk that the insured individual may pass away sooner than the insurer anticipates
  • Cost of insurance: This actual cost of insurance protection is based on the insured person's age, gender, health and the amount of the death benefit.
  • Surrender charges: The amount deducted from cash value if you cash in or surrender your policy early, while the surrender charge period is in effect. The amount varies among insurance companies, but in many cases the amount of the surrender charge drops annually until it disappears altogether
  • Monthly per thousand charge: According to Nationwide, this monthly fee is based on the insured person's age, gender and underwriting classification
  • Fund management fees: These are paid to investment fund managers for selecting investments, and doing all the paperwork needed. The fees are typically taken from the price paid for the shares of underlying fund options, not from your cash value. Fee amounts vary by company.

It also pays to be aware that some insurance companies prefer that you pay your life insurance premiums just once a year. If it's difficult for you to budget for one large payment and you would prefer paying monthly or quarterly, you may face what's know as a "fractional premium" or convenience charge added on to monthly, quarterly, or semi-annual payments. The amount, like many fees, varies by company.

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