Question 1

What fees does a variable universal life (VUL) policy charge?

Accepted Answer

VUL policies charge five layers of fees: (1) premium-load charge (3–8% of each premium), (2) cost of insurance (COI — age-based mortality charge that rises every year), (3) mortality & expense risk charge (M&E — 0.4%–1.0% of cash value annually), (4) administrative fees ($5–$15/month), and (5) underlying sub-account (mutual fund) fees of 0.5%–1.5% per year. Combined drag is typically 2.5%–4.0% per year on cash value.

Question 2

How does VUL cost of insurance (COI) work?

Accepted Answer

COI is the monthly mortality charge — the insurer's cost of providing the death benefit minus the cash value. It is calculated as (death benefit − cash value) × COI rate. COI rates rise sharply every year as you age (10x or more between age 45 and 75). If cash value can't cover rising COI, the policy lapses unless you pay larger premiums. This is why VUL illustrations look great early but can implode in years 20–30.

Question 3

What is the mortality and expense (M&E) charge in a VUL?

Accepted Answer

The M&E charge compensates the insurer for assuming mortality risk and policy expenses. It is typically 0.4%–1.0% of cash value annually, deducted daily from sub-account values. M&E is separate from COI — COI funds the actual death benefit; M&E funds insurer overhead, distribution costs, and guarantees. A 0.85% M&E on a $250,000 cash value costs $2,125/year in pure drag.

Question 4

How do sub-account fees affect VUL returns?

Accepted Answer

VUL cash value is invested in sub-accounts that resemble mutual funds. Each sub-account charges its own expense ratio (usually 0.5%–1.5%, sometimes higher than retail fund equivalents). Stack that on top of M&E (0.5–1.0%) and admin fees, and total drag is 1.5%–3.0% of cash value annually — far higher than buying the same funds in a brokerage account. Choose institutional or index sub-accounts to reduce this drag.

Question 5

When does VUL make sense despite high fees?

Accepted Answer

VUL makes sense when: (1) you've maxed out 401(k), IRA, and HSA and need additional tax-deferred growth, (2) you have a strong permanent death benefit need (estate or business), (3) you're in a 32%+ marginal tax bracket, (4) you can fund the policy at or near MEC limit for max cash value, and (5) you can keep the policy for 20+ years. Otherwise, buy term + invest the difference typically wins.

Question 6

Are VUL fees disclosed in the prospectus?

Accepted Answer

Yes — VUL is a securities product, so the SEC requires a prospectus disclosing all fees. Look for the 'Fee Tables' section. The illustration you receive shows projected cash value at 0%, 4%, 6%, and 8% gross — but the assumed expense drag (often 100+ basis points) is what determines whether the policy actually performs. Always demand a 'zero growth' illustration to see how fast cash value erodes without market gains.

Variable Universal Life (VUL) Fees Calculator

What is variable universal life (VUL) and how do the fees work?

How to use this VUL fee calculator

When VUL makes sense — and when it doesn't