Understanding the Fees, Expenses, and the Cost of Insurance in an IUL
Because an IUL is essentially a life insurance policy, there are some IUL fees and expenses to consider. That being said, however, most insurance and financial professionals who specialize in IUL will aim to build your plan with as little life insurance coverage as possible in order to keep your costs at a minimum.
For instance, when you know approximately how much you want to save in your IUL, a life insurance retirement plan specialist can work “backward” and solve for the minimum death benefit amount that is necessary for keeping your plan IRS-compliant, as well as income tax-free.
Some of the costs that are commonly associated with life insurance retirement plans can include:
- Cost of Insurance (COI) – With any life insurance policy, including an IUL, there is a cost for the insurance company to keep the death benefit coverage in force. If the premium falls below this amount, the insurer may use funds from the cash value component to keep the policy in force.
- Premium Charge – A charge deducted from each premium payment from both the Current Accumulation Value and the Guaranteed Accumulation.
- Per Unit Charge – Cost to cover underwriting, distributing, and issuing the policy.
- Rider(s) – Various riders may be added to the policy in some cases. For example, long-term care or chronic illness rider could allow you access to funds if you are diagnosed with a particular illness or you are required to reside in a nursing home for a certain period of time. Adding these riders may require an added premium charge. Most carriers offer a Chronic and Terminal Illness rider at no cost.
- Surrender Charge(s) – With most life insurance and annuity products, a surrender charge will be incurred if you cancel the policy – or even if you make withdrawals over a certain amount – within the first several years. The surrender (or withdrawal) charge is in addition to any taxes and/or IRS early withdrawal penalties you may owe. With an IUL, though, you won’t have to pay a surrender if you borrow funds rather than withdraw them.
Unless a LIRP is properly designed, the costs that are associated with it could end up overpowering the growth in the cash value component of the policy. So, it is important that you work with an advisor who is experienced in constructing IULs, and who can best fit the plan for your specific objectives.
Qualifying and Underwriting
As their name implies, life insurance retirement plans are essentially life insurance policies – and because of that, not everyone may qualify for an IUL, particularly if you have certain health issues.
Even though IULs are usually designed with the minimum amount of death benefit possible, the life insurance company is still taking on a risk when it accepts someone as an insured. Therefore, if an applicant has heart issues or other potentially life-threatening conditions, it is more likely that the insurer will have to pay out a death benefit sooner rather than later.
It is important to note, though, that even though all insurers have at least some qualification criteria in place for their policies, not all carriers use the exact same criteria when they underwrite an applicant.
With that in mind, sometimes finding the right insurance carrier is not so much about the actual IUL plan itself, but rather how the insurer goes about the underwriting process. This is particularly the case if you have pre-existing health conditions.
In addition, the difference between getting a preferred plus premium rate versus a standard premium rate can have an impact on the cash value growth. So, it can be extremely advantageous to work with an independent insurance professional when setting up an IUL. That way, he or she can point you in the right direction in terms of plan offerings and underwriting criteria.