What Fees Are Inside an IUL?
How do IUL fees actually get paid?
IUL fees are not billed to you separately; they are deducted from your premium and your policy’s cash value. The Maryland Insurance Administration’s consumer guide to universal life explains that “part of the premium pays for your life insurance, and any remaining funds are put into the cash value of your policy,” and that the premium plus the cash value “must be enough to pay the cost of insurance and administrative charges.”
In practice, the flow inside most IULs looks like this:
- You pay a premium.
- A premium load (a percentage of that payment) is taken off the top.
- The rest goes into the policy’s account value.
- Each month, the insurer deducts the cost of insurance, administrative charges and rider charges from the account value.
- Whatever remains can be credited interest based partly on the performance of a market index, subject to a cap, a participation rate and a 0% floor. The 0% floor is a contractual guarantee that credited interest will not be negative in a crediting period; it depends on the issuing insurer’s claims-paying ability, and monthly charges are still deducted in a 0% year.
That last point matters. An IUL’s 0% floor protects credited interest, not the account value, because charges still come out even when the index credit is zero.
What fees are inside an IUL? The fee-by-fee breakdown
The table below lists the charges commonly found in IUL contracts. Names and amounts vary by insurer and product, so treat this as a map, not a quote.
| Charge | How it’s usually calculated | When it’s deducted | How it tends to change over time |
|---|---|---|---|
| Premium load (premium expense charge) | A percentage of each premium paid | Each time you pay a premium | Often higher in early years; some products reduce it later |
| Cost of insurance (COI) | A rate per $1,000 of “net amount at risk” (death benefit minus account value), based on age, sex, underwriting class and tobacco use | Monthly, from account value | Rate generally rises each year with age; insurers can raise current rates up to the guaranteed maximum in the contract |
| Per-unit or face-amount charge | A monthly charge per $1,000 of initial death benefit | Monthly, from account value | Often applies for a set number of years (commonly the first 10 or so), then drops or ends |
| Policy/administrative fee | A flat dollar amount per month | Monthly, from account value | Usually stable; contract sets a guaranteed maximum |
| Rider charges | Varies by rider (flat, per $1,000, or percentage) | Monthly, or when a benefit is exercised | Depends on rider; some accelerated benefit riders charge only if used |
| Surrender charge | A schedule set in the contract, usually declining each year | Only if you surrender or, in some contracts, reduce the face amount during the surrender period | Declines over the surrender period (commonly 10 to 15 years), then reaches zero |
| Policy loan interest | An interest rate on money borrowed from the policy | Accrues on outstanding loans | Fixed or variable depending on loan type; not a charge unless you borrow |
| Index or bonus-related charges | Some products charge for enhanced crediting features, multipliers or bonuses | Monthly or annually, from account value | Product-specific; read the contract and illustration closely |
General description for education only. Actual charges, schedules and guaranteed maximums are set by each insurer’s contract and vary by state and product.
What is the cost of insurance charge, and why does it rise?
The cost of insurance (COI) charge is the price of the pure life insurance protection inside an IUL, and it is usually the largest ongoing charge. The Wisconsin Office of the Commissioner of Insurance put it plainly in a December 3, 2021 consumer alert: “The main expense of a universal life policy is the cost of insurance charge,” and “as you age, the rate of the cost of insurance charge will increase.”
The COI rate is applied to the policy’s net amount at risk, which is roughly the death benefit minus the account value. That creates two levers:
- Age. The COI rate per $1,000 climbs as the insured gets older, according to both the Maryland Insurance Administration and the Wisconsin OCI.
- Account value. A larger account value lowers the net amount at risk (on a level death benefit design), which can slow the growth of total COI deductions.
The Wisconsin OCI also notes that insurers can raise COI rates, but “can never increase rates above the guaranteed maximum rates provided in the policy.” The guaranteed maximum rates are what the “guaranteed” column of an illustration is built on, which is why that column usually shows the policy lapsing much sooner than the “current” or illustrated column.
Why are IUL fees front-loaded?
Many IUL charges are heaviest in the first decade because the insurer pays for underwriting, policy issue and agent compensation up front and recovers those costs over time. That is why early-year cash value is often well below the total premiums paid, and why surrender charges exist: they protect the insurer if a policy is cashed out before those upfront costs are recovered.
Here is a hypothetical way to picture it, with round numbers chosen only for illustration:
| Hypothetical year | Main charges in play | What it often means |
|---|---|---|
| Years 1–10 | Premium load, per-unit charge, admin fee, COI, surrender charge schedule | Cash surrender value may be well below premiums paid |
| Years 11–20 | Per-unit charge often reduced or gone; surrender charges often ended; COI rising with age | Charges as a share of account value may drop if the policy was well funded |
| Later years | COI is the dominant charge and keeps rising | Underfunded policies are most at risk of lapse here |
Hypothetical example only. Not a projection of any policy’s values.
How do fees connect to a policy lapsing?
IUL fees cause a lapse when monthly deductions exceed what the account value can cover. The Maryland Insurance Administration warns that if the policyholder does not raise the premium or adjust the death benefit when costs rise, “the policy will lapse when the cash value is not enough to pay the cost of insurance.”
This is the core reason many existing IULs aren’t structured correctly. A policy sold at a minimum premium, with a death benefit larger than the goal requires, spends most of each dollar on charges and builds little cushion for the years when COI rises. If the original illustration assumed a higher cap rate than the insurer now offers, the gap can widen further.
Are IUL fees disclosed?
Yes. State insurance rules require universal life contracts to disclose their guaranteed maximum charges. Missouri’s universal life regulation (20 CSR 400-1.100), for example, requires the policy to describe “the guaranteed maximum expense charges and loads,” “the guaranteed maximum mortality charges,” and “any surrender or partial withdrawal charges,” and requires at least one free annual report showing amounts credited and debited by type. Many states follow the NAIC’s Universal Life Insurance Model Regulation in similar ways.
For IUL illustrations specifically, the NAIC adopted Actuarial Guideline 49 in 2015 (later updated as AG 49-A) to limit the crediting rates insurers can illustrate and to require additional disclosures. An illustration is still a hypothetical projection, not a guarantee.
To see your own policy’s fees, look in three places:
- The policy contract: guaranteed maximum charges and the surrender charge schedule.
- The annual statement: what was actually deducted last year, by type.
- An in-force illustration: how current charges and current crediting assumptions play out from today. The Wisconsin OCI recommends requesting one every year.
Who this is NOT for
An IUL with these layered charges is usually not the right fit for:
- Someone who only needs coverage for a set period, such as until a mortgage is paid or children are grown. Term life insurance generally costs far less for pure protection.
- Anyone who can’t commit to funding the policy consistently for many years. Front-loaded charges and surrender schedules penalize early exits.
- People who need this money accessible in the next several years. Early cash surrender value is often below premiums paid.
- Anyone looking for an investment. An IUL is life insurance. It does not participate directly in the market, and its credited interest is limited by caps and participation rates.
If you’re not sure which side of that line you’re on, a short conversation can sort it out. Schedule a free call and we’ll look at your goal before we look at any product.
What questions should you ask about IUL fees before you buy?
Ask the agent to show you, in writing and in the illustration:
- What is the premium load, and does it change after a certain year?
- Is there a per-$1,000 face amount charge, and for how many years?
- What are the guaranteed maximum COI rates, and how does the policy perform on the guaranteed column?
- What is the full surrender charge schedule, year by year?
- What does each rider cost, and is it charged monthly or only when used?
- Are any bonuses or multipliers tied to an extra charge?
- How do policy loans work, and what interest rate applies?
If you already own an IUL, a policy review can answer these from your contract and a current in-force illustration. A review is free, and many policies should be kept as they are. Replacing a policy can trigger surrender charges, new underwriting and a new contestability period, so it only makes sense when the numbers clearly favor it.
Frequently asked questions
What is the biggest fee in an IUL? The cost of insurance charge is usually the largest ongoing fee in an IUL. The Wisconsin Office of the Commissioner of Insurance calls it “the main expense of a universal life policy,” and its rate rises as the insured ages.
Can an insurer raise IUL fees after I buy the policy? An insurer can raise current charges, including cost of insurance rates, but only up to the guaranteed maximums written in the contract. Caps and participation rates can also change within contract limits.
Do IUL fees stop if the index credits 0%? No. The 0% floor guarantees credited interest won’t be negative for that period, but monthly charges are still deducted from the account value, so the account value can go down in a 0% year.
How long do IUL surrender charges last? IUL surrender charge periods commonly run about 10 to 15 years and decline each year, but the exact schedule is set by each contract. Check the surrender charge table in your policy.
Are IUL policy loans tax-free? Policy loans and withdrawals can be income-tax-free when the policy is structured and managed properly. Loans accrue interest, and a policy that lapses with a loan outstanding can create a taxable event. This is not tax advice; talk with a tax professional about your situation.
How can I see the fees in my current IUL? Your annual statement shows what was deducted last year by type, and an in-force illustration from your insurer shows how current charges play out going forward. Both are generally available at no cost.
About the author
Brandon Lenhoff is a licensed insurance agent and owner of Lenhoff Financial, Inc., a virtual independent insurance agency based in Lincoln, Nebraska and licensed across the U.S. He specializes in indexed universal life, fixed and fixed indexed annuities, MYGAs, mortgage protection and term life insurance, and he previously built and sold a mortgage protection agency. Phone: (402) 413-1351 · lenhofffinancial.com
Want to see what your IUL is really charging?
Whether you’re comparing quotes or wondering about a policy you already own, I’ll walk through the charges line by line with you, at no cost. Schedule a free call.
Sources: Maryland Insurance Administration, “Universal Life Insurance” consumer guide (insurance.maryland.gov); Wisconsin Office of the Commissioner of Insurance, Consumer Alert, December 3, 2021 (oci.wi.gov); Missouri 20 CSR 400-1.100, Universal Life (law.cornell.edu); NAIC Actuarial Guideline 49, approved June 18, 2015 (via InsuranceNewsNet).
Brandon Lenhoff is a licensed insurance agent and the owner of Lenhoff Financial Inc. in Lincoln, Nebraska. His team helps families across the U.S. evaluate Indexed Universal Life, fixed indexed annuities and other life insurance solutions, and reviews existing policies.
Brandon Lenhoff is a licensed insurance agent with Lenhoff Financial Inc. Insurance products only; this article is for educational purposes and is not tax, legal or investment advice. Guarantees are backed by the claims-paying ability of the issuing insurer.