PREMIUMS AND DEATH BENEFITS
The premium and the minimum death benefit for a variable life policy are fixed at the time of the policy's issuance. The policyholder is covered from the date of issuance to the date of death, as long as the premiums are paid. The death benefit may vary in amount as a result of the investment performance of the separate account. As the performance of the separate account rises and falls, so does the policy's death benefit. However, the death benefit may never fall below the minimum guaranteed death benefit. As the policyholder makes premium payments, certain expenses are deducted from the gross premium, and the balance or the net premium is invested in the separate account. The expenses that are deducted from the gross premium are:
• Administrative fee
• Sales load
• State premium tax
The administrative fee is a one-time fee to cover the costs of issuing the policy. The sales load pays commissions to compensate the representative who sold the policy, and the state premium tax goes to the state for policies sold within its borders. The net premium is invested in the insurance company's separate account, and the insurance company will make certain deductions from the separate account to cover the cost of the policy. Those costs are:
• Mortality risk fee
• Investment management fee
• Expense risk fee
MORTALITY RISK FEE
The mortality risk to the insurance company is the risk that the individual may die unexpectedly after only making several premium payments. The insurance company deducts a fee from the separate account to cover this risk. The mortality risk fee is also known as the cost of insurance.
INVESTMENT MANAGEMENT FEE
Professional money managers must manage the portfolios in the variable insurance policy's separate account. These portfolio managers usually receive a fee based on the value of the separate account, and the insurance company will deduct a fee from the separate account to cover this expense.
EXPENSE RISK FEE
The insurance company must know the costs involved with the issuance of life insurance policies. The expense risk to the insurance company is that the costs of issuing policies may increase, making it unprofitable to issue policies. The insurance company will deduct a fee from the separate account to cover this expense.