Other fees include policy loans and surrender charges.

• Policy loans: A major benefit of permanent insurance is the ability to borrow money against the contract’s surrender value (the value the policy would have if you decided to take the cash rather than the death benefit). If you die before the policy loan is paid back, the beneficiary of the loan will receive the face value of the contract minus what is still owed.
• Surrender charges: Surrender charges, back-end loads, and contingent deferred sales charges refer to the amount of the policy’s account value that you forfeit if you cancel or terminate your policy within a specified period. These fees reimburse the insurance company for expenses that have not yet been recovered. Surrender charges can be significant (ibid. p.106).
• Other fees. There are a number of other fees and expenses that should also be taken into account. These include partial withdrawal processing fees, which are assessed for taking money out of the insurance policy; transfer charges, which are assessed for making asset transfers that are over the limit specified in your policy; and other charges that may be assessed for additional annual reports, increases in principal sums, additional riders, and so on. Not all companies assess all of these charges; be sure that all charges are disclosed when you are in the process of deciding what type of insurance to purchase.

When the charges, fees, and expenses are totaled, it is not uncommon for the total to be between 5 percent and 15 percent of every dollar you put into permanent insurance. Because of these fees and expenses, the cash-value portion of this type of insurance will grow more slowly than the investment portion of a less expensive term policy. However, the term life policy requires you to pay income taxes (capital gains taxes) each year on your investment returns, which can reduce the advantage of a term life policy.

Permanent insurance is not for everyone. It is a very complex financial instrument and will only help those who need the specific benefits this type of insurance has to offer. By understanding your needs and the different aspects of competing life insurance company policies—the charges, deductions, fees, and expenses of the invested assets—you can select a policy that will give you the maximum benefit at the lowest possible cost.

The following are some important questions to ask yourself about permanent insurance before you decide to invest:

• Are the premiums within my budget? Are costs reasonable?
• Can I commit to these premiums on a long-term basis?
• On a variable life policy, what is the assumed interest rate in the example given you by the insurance agent, also called an illustration?
• Is the classification shown in the illustration appropriate for me (i.e. smoker/nonsmoker, male/female)?
• Which figures are guaranteed and which are not?
• Will I be notified if the non-guaranteed amounts change?
• Is the death benefit guaranteed?
• Will the premiums always be the same, even if interest rates are lower than the illustration?
• Is the illustrated premium sufficient to guarantee protection for my entire life?
• Is the “current rate” illustrated actually the rate paid recently? What was the current rate in each of the last five years?
• What assumptions have been used regarding company expenses, dividends, and policy lapse rates?
• Does all my cash value earn the current rate?
• Is the illustration based on the “cash surrender value” or “cash value?” The cash surrender value is usually lower and reflects what will be paid if the policy is cancelled.