Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Cost Competitiveness of Life Insurance

Posted by William Byrnes on February 14, 2011


Cost competitiveness of life insurance policies is an obvious determinant of suitability.  Keeping costs low is critical because every dollar spent on expenses is one less dollar available to purchase more death benefit.  In fact, a recent study by Morningstar revealed that “Low fees are likely to be the best predictor of a mutual fund’s future success,” and the same certainly holds true for life insurance products. 

While different insurers refer to different policy expenses in different ways, all policy expenses in all life insurance policies fall into the following four categories: 1) cost of insurance charges (COIs), 2) fixed administration expenses (FAEs), 3) cash-value-based “wrap fees” (e.g., M&Es), and 4) premium loads.   Each type of policy expense and its role and relevance in pricing and suitability is discussed in the complete analysis at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of life insurance product suitability in Advisor’s Journal, see Life Insurance Product Suitability (CC 10-90) and Financial Strength and Claims-Paying Ability (CC 10-115).

We invite your questions and comments by posting them or by calling the Panel of Experts.

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