IUL’s Fees Examined and Explained

Updated December 2024 · by John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

19 years designing client policies: 14 on my own family, from 3 true mutual companies

Averaged across the whole life of the policy, the fees inside a properly max-funded Indexed Universal Life (IUL) policy come to 1.54% of account value — and 0.62% if you set aside the first five years as the price of admission. Those aren’t marketing numbers. They come from unbundling every charge on a real illustration, year by year, and this page (and the video) walks through exactly where each one goes.

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What the IUL Fee Hit Pieces Claim

Start reading about Indexed Universal Life online and you’ll run into a whole genre of article describing its cost structure as a ticking time bomb — a trap the insurance company is waiting to spring the moment your money is inside. The story goes that the fees ramp up exponentially, cannibalize your cash value, and lapse the policy.

Could something like that happen? In the most extreme situations, sure. But it’s hard to imagine getting there when the client’s goal is to max fund the policy — the most premium into the least amount of death benefit. Performance would have to come in wildly below what was projected, or the premium schedule would have to end up completely different from what was planned. And even then, there are still measures to ratchet the death benefit down.

Notice who’s writing in this space, though. The hit pieces come from people who’ve never held a charges report. The glowing reviews come from people selling the product, and they never show you one. “What does an IUL actually cost, line by line?” is the one question neither side answers — so rather than argue about it, let’s unbundle the actual charges year by year and see what they come to. After 19 years and over a thousand policy designs, this is the report I’d want shown to me.

Charges Are Based on Net Amount at Risk, Not Total Death Benefit

Here’s the fact the fee critics consistently leave out: an IUL’s insurance charges are levied on the net amount at risk — the gap between your cash value and your death benefit — not on the whole death benefit. In plain English, you only pay for the piece the carrier would actually be out of pocket for. Everything below follows from that.

The illustration behind all of this is a male age 45 in preferred health — close to my own age and health when I built it. It uses death benefit option two, which means the death benefit increases through the early years and then flattens out once premiums stop, as the cash value climbs up toward it.

The cash value tracks along with the policy and eventually converges on the death benefit. At some point it hits what’s called the corridor test, and the insurance company automatically starts pushing your death benefit up.

With this structure the charge stays roughly level through the premium-paying years, because the death benefit is increasing by the size of your cash value. After that, the gap — that net amount at risk — starts getting smaller. Cost per unit of insurance climbs as you approach retirement age and beyond — that part of the criticism is true.

Look at the cost-of-insurance column and the charges do indeed go up as the client gets older, until they approach about $7,300. Then they start going back down. The cost per unit is still rising the whole way through: he pays more to insure 61 than 60, more at 62, more at 63 and 64. But his cash value is converging on the death benefit, so he’s buying fewer and fewer units of that insurance. That’s a very big point the hit pieces leave out.

The Other Fees & Charges on Your Illustration

If you have a supplemental charges report run on your illustration, here’s the rest of what shows up on it.

The first is the premium expense and tax surcharge. Most clients don’t realize insurance companies owe a premium tax on every premium they receive, paid to the state where the policy was issued. That tax varies by state, so it’s possible not all of this charge ends up going to state tax.

The way I think about it — and this is an analogy, not exactly 100 percent true — is old-school money management. Back when no-load mutual funds were hard to find, you either paid an upfront commission and carried lower loads inside the funds, or paid no load upfront and carried higher loads inside. One way or the other, you paid.

It isn’t apples to apples, but the insurance company is agreeing to manage your money on very favorable terms. Once you’re done paying premiums they’re not really collecting anything for that anymore — all that’s left is the cost of insurance. The expense charge is more expensive during the first 10 years — those are the acquisition charges — and after that you’re merely paying a low policy fee. It behaves a lot like paying more of an upfront load to have the carrier manage your money this way.

Compare that to whole life and the expense charges are often comparable. Whole life is harder to unbundle — there’s no charges report inside it — but we find you pay something similar, and it usually comes out in the first one to three years of the policy depending on how it’s structured. With IUL that same cost is spread out over 10 years, so more of your money stays in there working and earning for you, even if your net cash surrender value looks lower on paper.

That lower surrender value is an arbitrary surrender charge, put there to make sure the carrier has enough time to recoup its cost of issuing the policy. On this particular policy we didn’t use an enhanced cash value rider — the thing that waives the surrender charge or brings the surrender value much closer to the account value — which is why those columns show zero.

Worth noting too: this policy has very favorable chronic illness and critical injury benefits built into the underlying policy chassis rather than bolted on as a rider, so there’s no charge for them at all.

Charges as a Percentage of Account Value

Expressed the way you’d judge any investment — as a percentage of the money it’s coming out of — IUL’s charges start punishingly high, fall to ordinary money-management territory by year 6, and reach no-load index-fund territory from year 16 on. I’m sure some of you are thinking, “Fine, those were the good charges — now it gets horrible like I was reading about.” So let’s take a look.

I loaded the same fees and charges into a spreadsheet and added two columns: total account charges, aggregating all of them, and charges as a percentage of account value. That second one is the mutual fund analogy again — it’s the equivalent of an expense ratio, charges expressed against the asset value they’re coming out of.

The first five years are the worst years. You’re paying a premium load that eventually vanishes, plus higher expense charges that also eventually vanish, and you don’t have much account value in there to offset any of it. Taken in a vacuum it looks egregious. When you hear you’re going to pay 16% — maybe more, and that’s already assuming you get some performance in year one — nobody would sign up for that.

But look at years 6 through 10. That range lands a lot more in line with ordinary money management. Hire a financial planner and you’re often paying 1% to 1.5% plus whatever the underlying funds cost, so depending on what those building blocks run, you may be paying right around the same amount.

Years 10 to 15 go down substantially. You’re still paying a hefty premium load out of every new premium dollar coming in, but by then you have enough account value growing to offset some of it, so it doesn’t feel as bad. From year 16 on, we’re down to what a no-load index fund might cost anyway.

And I don’t know any index fund that’s going to give you a death benefit. No fund is going to say: you’ve got $513,000 with us, and tell you what, if you die we’ll hand your family a million. That’s a pretty sweet thing to have thrown in.

Keep going down the schedule and the charges keep falling until somewhere around age 75 or 76, where they start back up. In dollar terms they stay pretty nominal and manageable, because the cash value is sitting right up against the death benefit. It’s only in the very late years, where death is set to occur, that the dollar amounts get large.

At age 90 this policy shows roughly $4.3 to $4.4 million of cash value against $4.5 to $4.6 million of death benefit. So you’re really only paying for about $217,000 of actual death benefit.

In a vacuum, “eighteen thousand, almost nineteen thousand dollars is a pretty steep price to pay for a death benefit” sounds about right. Well, guess what — there’s a really good chance you die at age 90. That’s exactly why they’re charging you that.

And remember what keeping the policy in force buys you. Even if you’ve bled it way down for income, all the lifetime loans and withdrawals up to basis are deemed tax free once any amount of death benefit is paid. As a percentage of the money in there working for you, the charge stays quite nominal. Averaged across the whole life of the policy, it comes to 1.54%.

What Happens When You Squash the Cap

Now some of you are thinking, “You know, Hutch, this interest rate you’re showing is probably a good one.” You’re right. It’s 7.25%, and that’s the AG-49 rate — the carrier looks back 65 years, takes every 25-year rolling period inside that window, and averages the result through its own caps and floors. On this policy that band was 0% to 13%.

I also ran it over just the 45 years since I was born in 1973, and that window came back at 7.28%. We stayed with 7.25% anyway.

Then I asked the more useful question: how far would the cap have to fall to knock a full percent off that rate? The answer was 10.2% — down from 13%. Over that same 45-year window, a cap that low would only have earned 6.25%.

So what do the fees and charges look like in that squashed-cap scenario? The lifetime average goes from 1.54% up to 1.59%. Not very much.

The percentage is higher, because there’s less cash value to spread it across. But you’re also propping up less death benefit than the $18,000 we were paying for at age 90, which is nice. We squashed the cap and this policy is still very, very far from blowing up.

The First Five Years — Would You Do It All Over Again?

One more thing worth showing. I often tell clients to treat the first five years of premiums almost like money going into a savings account, or into the mattress. Take those five years out of the average and the charge across the rest of the policy’s life is 0.62%.

So all this talk about how expensive indexed universal life is, or how expensive life insurance is in general — it’s really not based on facts. If you heard it from a financial planner or an accountant, there’s a good chance they just read the same garbage you did. Test and measure your own numbers instead. Pull your own policy, stress test it, and decide for yourself whether that’s an acceptable cost-benefit relationship. Here’s how we stress test policies.

And on those first five years being the worst ones: even at the squashed 6.25%, for every 100 you put in you have 102 working for you — plus you had a death benefit the entire time.

I talk to clients about this a lot, especially real estate investors or business owners. When you started your business, were you profitable early on? Were you profitable in your first years? And even if you were — if you factored in all your time and blood, sweat and tears, were you really profitable?

Real estate is the same. You have improvements to do, paint, curtains, whatever it is you’re doing. And those real estate investors are still doing quite well, because they understand what a great long-term asset it is to own.

So I’ll ask them, “Would you do it all over again?” And they say yes. That’s the honest frame for an IUL’s front-loaded costs: the worst years come first, when the least is at stake, and they buy an asset that gets cheaper to own every year you keep it — the exact opposite of a management fee that grows with your balance forever.

Don’t believe the hype — in either direction. An article (or an AI) can tell you IUL “has high fees.” What it can’t do is read your charges report, against your funding schedule, at your age and health. Do your own analysis on this one — or let us do it with you.

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John “Hutch” Hutchinson, ChFC®, CLU®, AEP®, EA

Founder of BankingTruths.com · 19-year practitioner · 14 family banking policies across 3 companies · independent broker

BankingTruths.com is John “Hutch” Hutchinson’s independent education and brokerage platform, not a captive agency tied to one carrier. Educational only. Indexed Universal Life policies involve fees, caps, participation rates, spreads, policy charges, and loan risk. Index credits are not guaranteed. Policy loans and withdrawals may reduce cash value and death benefit, may cause the policy to lapse, and may create taxable income if not managed properly. This analysis represents the author’s professional opinion based on 19 years of experience and should not be considered tailored financial advice for your personal situation. Consult your tax, legal, and financial professionals before implementing any strategy.