Premiums Unraveled
What does the life insurance company do with your premium? Most* life insurance policies don’t spell out in detail just how the life insurance company makes use of your premium, so here’s a look behind the scenes:
Mortality (claims)
The most obvious and considerable expense for a life insurance carrier is mortality, that is, paying out death benefits for policyholders who die. The company invests a portion of the premiums it receives (into real estate, stocks, etc.), and it keeps a the liquid remainder in hand. In this way, the company creates some profit for itself while assuring fiscal reliability for its clients.
Loading
“Loading” is a blanket term which covers most other expenses associated with life insurance. Acquisition expenses are those that relate directly to the sale of a new policy. These include marketing costs and agent commissions. Overhead expenses are those that relate to keeping a business running. They include office and personnel costs.
Premium taxes
Some states impose taxes on life insurance premiums. You don’t actually see these taxes because they are charged to the life insurance carrier, who factors them into your premium charge.
Policy-specific expenditures
Cash value—In traditional whole life insurance, a portion of your premium augments your policy’s cash value.
Policy administration charges—Also called “maintenance charges.” Universal life insurance carries an extra charge for the maintenance which the insurer must perform on it.
Sub-account management fees—In variable life insurance, your cash value is allocated among sub-accounts of your choosing. A money manager is in charge of investing each sub-account.
Rider charges—If you elect to add a rider to your policy, it will probably come with additional charges of its own.
*The exception is universal life insurance. In universal life insurance, the entirety of your premium goes directly into your policy’s cash value. The insurance company then takes its fees from your cash value.
