Quote:
Originally Posted by OldShooter
@independent, you seem to be very familiar with this subject. Despite my request, former salesman @brucethebroker is apparently not interested in explaining the financial aspects of these policies, like commissions and costs. How about you? Can you explain these?
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I think your post #36 is the most important response. I agree that most people do not need life insurance late in life. Most of us are better off buying term when we have others relying on our wages, then dropping it as our financial position changes. That's what I did, just like you.
So, discussions of "UL can be funded at a level that makes it a permanent policy" are irrelevant to most people, and this post is just a theoretical question.
In a UL policy, you pay a premium, the company probably deducts some "percent of premium" expense, at least 2% (because state premium taxes are about 2%). The rest goes into a fund. Each month, the company credits interest to your fund, deducts some expense charge, and deducts the cost of insurance.
That last factor is (insurance charge per thousand) x (excess of your death benefit over your current fund).
Note that the charge per thousand goes up as you age. If you're putting enough money into the policy, the "excess of death benefit over your fund" is decreasing. So, it's possible for the dollar amount of the monthly mortality charges to be level or even decrease, even though the rate per thousand goes up.
That same mechanism happens in traditional life policies (except the calculations are annual instead of monthly). In UL they are visible, in traditional they are hidden.
Now, for expense loads. Some are labeled - the percent of premium and the monthly expense charge. But, others are hidden.
The interest credited is not equal to the interest the company earns on its bond portfolio. The difference covers expected credit losses, some contribution to "profit" or "cost of capital" (depending on your politics), and some operating expenses.
The mortality charge is not exactly equal to the expected mortality rate. Again, the company charges more to cover expenses and profit goals. (Due to some regulatory issues, I think the room to charge expenses on the mortality charge has decreased, but I haven't kept up on that.)
In practice, the first year cost of putting the policy in force - Marketing, Sales, Underwriting, and FY Admin - exceed the actual first year premium. So the company goes in the hole in the first year. It recovers that FY loss, and pays the annual admin costs, through all all the loads mentioned above.
Back in the day, the company I worked for illustrated a significant step in factors after the first 10 years. In the 11th year, the interest load decreased (so interest paid increased), the mortality load decreased (so there was a downward jog in mortality charges, and the explicit monthly expense factor decreased. This all occurred because the company planned to recover that first year loss over the first 10 policy years.
All that was similar to what that company did for traditional policies. The differences were that the calculation was annual instead of monthly, and all this stuff was completely hidden from the buyer. It was just a premium, a guaranteed death benefit and surrender value, and a non-guaranteed dividend. The dividends got bigger as the policy aged, partially because early year dividends were squeezed by the need to recover first year losses.
That's for a simple interest crediting UL. If you really care about an equity indexed UL, where the credited interest is tied to a stock index, I can same some stuff, but it will be another long post.
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