When life insurance carriers price life insurance policies, there are a number of factors that they need to take into account. The primary issues a life insurance company considers when pricing a policy include the mortality risk of the insured, the amount of insurance being requested and the expenses needed to operate the company.
Expenses are a fact of life for any business. Like most organizations, ife insurance companies need to pay salaries,rent, commissions and other operating costs. Generally you can lump the carriers expenses into two general classes: Ongoing operating expenses and the cost of new business acquisition.
Whole life insurance and Term life insurance policy premiums have their projected costs worked out in the initial pricing of the policy when it is issued, but flexible premium policies like Universal Life Insurance Policies remain sensitive to cost issues for the life of the policy. The insurer’s ongoing expenses can be dealt with in a number of ways in universal life insurance policies: Each year, the carrier will apply a percentage of its operating expenses against in force policies.
Ongoing expense charges may be deducted from each premium payment when the owner makes her premium payment. Alternatively , a charge for ongoing expenses may be made monthly from the policy’s cash value, or can be split amongst the existing cash value and the incoming premium. When ongoing expense charges are deducted from each premium, the policy spec page usually notes the anticipated deduction. Most policies have an expense charge of 4 to 7 percent. If your carrier is deducting the costs from your cash value instead, then your specifications page will note that the carrier is deducting a percentage of cash value. Generally the costs will be 3-5 cents per $1000 in specified coverage. The carrier might even specify a fixed monthly policy fee. The more competitive policy will, of course, tend to have lower expense charges.
Beyond the carriers monthly expense fees, it will also need to recover the costs of finding you as a client and selling you the policy. A typical carrier might spend your first two years in premiums on the costs of getting your policy “on the books.” The agent generally makes 90 to 105 percnet of the first year premium as his commission when he sells the policy. His Broker/General Agency might make another 45% to cover their costs of managing the policy placement process. The carrier also needs to pay for medical records, and underwriters, and analysts, etc. Excess first-year expenses will be recovered by the carrier over the life of the policy. They may be recovered from each premium received by the company, or will be deducted from the cash value in the form of a surrender charge if the policy is terminated before the costs are fully recovered.
A universal life insurance policy’s surrender period may be as short as 10 years or as long as 20 years following the policy issue date. In general, the carrier is almost always in the red on any policy they sell until the policy has been in force for at least three years, so they structure their charges to discourage consumers from bailing out of a policy until its costs have been recovered and the transaction has been profitable.