Yushield – Financial Safety Starts Here

Whether as a financial professional or as a potential client, understanding the cost structure of Indexed Universal Life (IUL) is critical. This is also one of hot topics around IUL (please see previous post: What is Indexed Universal Life (IUL) and what are hot topics around IUL?). IUL policies involve multiple fees and charges deducted from premiums or the cash value, which can significantly impact policy performance.

Below is a detailed breakdown of the costs clients typically pay from their premiums in an IUL policy, based on available information and industry standards.

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📌 Costs Deducted from IUL Premiums

1. Premium Load

• Description: A percentage of each premium payment is deducted before funds are allocated to the cash value or used to cover other costs (e.g., admin and commissions).
• Typical Range: 5% to 20%; up to 30% in the first year for some policies.
• Example: A $10,000 annual premium with a 10% load results in $1,000 deducted, leaving $9,000.
• Notes: Some insurers (e.g., Mutual of Omaha) offer lower loads (6–8%), improving early cash value.

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2. Cost of Insurance (COI)

• Description: Monthly charge for life coverage, based on age, health, gender, and death benefit.
• Typical Range:
  • $0.20–$0.50 per $1,000/month for a healthy 40-year-old
  • $2–$5 per $1,000/month for a 70-year-old
• Example: $500,000 benefit × $0.30 = $150/month ($1,800/year)
• Notes: COI rises with age and can be adjusted by insurers (within limits). Some policies offer guaranteed COI rates.

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3. Administrative Fees

• Description: Charges for policy maintenance (e.g., record-keeping, statements).
• Typical Range: $5–$20/month or 0.5–1% of cash value.
• Example: $10/month = $120/year.
• Notes: May be bundled with other fees in some policies.

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4. Policy Fees or Rider Charges

• Description: Additional charges for optional benefits (e.g., long-term care, chronic illness).
• Typical Range: $50–$500/year per rider.
• Example: Long-term care rider at $200/year.
• Notes: Evaluate rider usefulness; they may duplicate existing coverage.

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5. Index Account Charges (Spreads or Asset Fees)

• Description: A portion of indexed gains may be deducted before being credited.
• Typical Range: 0.5% to 3% of indexed gains.
• Example: If index returns 10% and spread is 2%, only 8% is credited.
• Notes: Lower spreads (e.g., 0.5%) are more favorable for growth.

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6. Surrender Charges

• Description: Fee for early termination or large withdrawals during surrender period (typically 10–15 years).
• Typical Range: 5%–20%, declining over time.
• Example: $50,000 cash value × 12% surrender charge = $6,000 loss.
• Notes: Surrender charges discourage short-term use. Some designs reduce or waive charges.

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7. Loan Interest (If Applicable)

• Description: Interest on borrowed cash value; can be fixed or variable.
• Typical Range:
  • Fixed: 3–8%
  • Variable: 2–10% (tied to market index like Moody’s)
• Example: $10,000 loan × 5% = $500 interest/year.
• Notes: “Wash loans” (or called zero-interest net loan) may credit same rate as charged. Unpaid loans reduce death benefit and cash value.

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💡 How Costs Are Deducted

• From Premiums: Premium loads are deducted immediately upon payment.
• From Cash Value: Monthly/annual deductions include COI, admin fees, rider costs, and index spreads.
• Upon Surrender: Surrender charges reduce cash value withdrawn in early years.
• Loan Interest: Deducted from cash value or paid out-of-pocket.

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📈 Illustrative Example

Client pays $10,000/year for an IUL policy with the following structure:

• Premium Load (10%): $1,000 → $9,000 net to policy
• COI: $150/month = $1,800/year
• Admin Fee: $10/month = $120/year
• Rider: Long-term care = $200/year
• Index Spread: 1% of a 7% gain ($9,000 × 7% = $630 gain → $63 spread)

Total Year 1 Deductions:

• $1,000 (load) + $1,800 (COI) + $120 (admin) + $200 (rider) + $63 (spread) = $3,183

Net Year-End Cash Value:

• $9,000 (post-load) – $2,120 (fees) + $413 net index gain = $7,230

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🧠 Key Considerations for Financial Professionals

1. Compare Insurers
   • Look for favorable pricing (e.g., lower loads or COI)
   • Review detailed policy illustrations
2. Illustrate Conservatively
   • Use low or flat index returns to show impact of fees
3. Monitor COI
   • COI increases with age or insurer adjustments—advise clients early
4. Educate on Surrender Risk
   • Emphasize long-term commitment; early exits can be costly
5. Promote Overfunding
   • Paying more than the minimum accelerates cash value growth
6. Be Transparent
   • Clearly show all fees using illustrations; explain trade-offs vs. term or other strategies

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🏁 Final Thoughts

Indexed Universal Life insurance can be a powerful long-term tool when structured correctly. But transparency around costs is critical. As a trusted financial professional, your role is to help clients understand not just the benefits, but also the costs and commitment involved in maximizing IUL potential.