I recently received this question from Christine:

Hi Jeffrey,

I hear those whole life policys have huge fees, what are all the fees?

Here’s my initial answer…

Great question, Christine!

Unfortunately your question implies a common misunderstanding so lets clarify that issue first.  Clarifying things may be enough, but if it isn’t feel free to question or comment further.

Whole life insurance policies have no fees associated with them other than a small (usually less than $60)  “policy fee” that some insurance companies still charge when an application is submitted.  Whole life policies do, however, have three variables that affect their financial performance…

• mortality, which is the guaranteed cost of the insurance, which guarantees the death benefit.  If the insurer incurs extraordinary claims activity the non-guaranteed dividends are affected but the guaranteed elements are not
• administration, which are variable costs incurred managing the everyday business of the company
  • actuarial, rate making, underwriting, general management
  • policy issue, policyholder services, and ongoing accounting
  • agency management, marketing, commissions, etc.
• investment returns, which pay for administration and create…
  • the guaranteed cash values
  • the non-guaranteed dividends

Whole life insurance policies have been manufactured and sold in America for over 150 years. These three variables are well understood and very closely managed.  That allows mutual companies like Mass Mutual, New York Life, Ohio National Life and several others to perform consistently and predictably decade after decade, pay consistent dividends even during market crashes like the ones we have experienced this decade, and maintain the highest financial ratings possible for decades on end regardles of the performance of the general economy or the financial sector.

On the other hand, Universal life policies (first introduced into the market by stock brokers in the early ’80s), especially variable UL policies (introduced in the mid to late 90’s), and indexed UL policies (first introduced about 2002), have what you refer to as “huge fees.” While whole life policies guarantee the three major elements of life insurance contracts - premium, death benefit and cash value - UL products do not.

The fees in UL policies consist of…

• annually increasing cost of insurance (guaranteed to be level in whole life policies)
• variable administrative costs, which can increase (whole life policies control these costs so they only affect non-guaranteed dividends)
• cash accounts, in which the insurance company shares none of the risk, that decrease as well as increase (whole life policies guarantee these will increase every year)

Because of these factors, these policies are not recommended by the Eurekonomics’ Money for Life Model.  That’s not to say they don’t have a place in the financial lives of some Americans.  They may.  However, they are not apporpriate as the foundation of one’s personal wealth and finances.  Whole life insurance is.

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