by Bill Boersma | OC Consulting Group
When I ask policyowners what their life insurance costs them, they usually name their annual premium. The premium isn’t the cost. That’s like saying the cost of your 401(k) is what is withheld from your paycheck. It’s like saying the cost of flying is just the ticket price, while ignoring the baggage fees, seat upgrades, and the lesson learned only after the plane lands three hours late in a different city.
The truth is, premiums are just the cover charge. The real expenses are buried in the mechanics of the policy, quietly pulling value out year after year.
Where the Money Goes (and Usually Stays Gone)
Every life insurance policy Universal, Variable, Indexed, Whole comes with internal mechanics designed to make the math work for the carrier.
Among the hidden costs:
- Cost of Insurance (COI): the ongoing expense the insurer charges to cover your mortality risk. The per dollar cost increases each year and often by more than people realize. The total cost can increase dramatically if the policy isn’t built right or underperforms.
- Administrative & expense loads: the “miscellaneous” line items that look small individually but compound like weeds.
- Rider fees: chronic drains for benefits you may not understand.
- Loan interest or spread: the delta between credited and charged rates looks modest on paper but can gut long‑term accumulation.
- Index caps and participation rates: invisible controls letting the carrier keep more of the upside than you think.
Individually, they’re tolerable. Collectively, they can turn an attractive illustrated rate into something very different. In fact, a positive crediting rate may result in a negative return.
Why You Don’t See Them
Because you’re not supposed to. The ledger doesn’t always show “Expense: $X.” You have to know what to ask for, where to look and how to make sense of it. It shows neat columns of projected values under the comforting assumption that everything goes right forever.
It’s optimistic marketing wrapped in spreadsheet formatting. Technical truth? Sure. Practical truth? Not even close. Carriers know most policy owners will never notice. Agents, unfortunately, , often don’t fully understand. Their sales software auto‑populates “default” rates that make the deal look attractive.
How Promises Erode
Years down the road, when crediting rates drop or COIs drift upward, the policy that “paid for itself” starts needing extra infusions to stay alive. Cash values fade. Death benefits shrink. And the carrier’s standard response?
“Refer to your signed illustration and policy terms.”
Of course, they told you everything, didn’t they?
Why This Matters
Because those internal costs aren’t as clear and understandable as a mutual‑fund expense ratio. More importantly, the relationship between the costs and the credits aren’t commonly understood.
If you don’t understand the drag, you’ll eventually confuse luck for performance or mistake erosion for misfortune. Neither is true.
What You Can Actually Do
- Get an independent read. Have someone, not your agent, not the carrier, rebuild your ledger with realistic assumptions.
- Stress‑test everything. Run scenarios where returns or caps are 1–2% lower. If the policy collapses, you just learned what’s holding it together.
- Ask specific questions:
- What’s today’s true COI charge in dollars?
- How do credited rates compare to current index caps?
- What happens if dividends fall 1%?
- What does the carrier project for internal cost trends?
If those answers come in vague or cheerful tones, that’s your cue to slow things down.
Bottom Line
Life insurance is a long game with moving parts, not a static product. Every dollar of internal expense chips away at the promise sold on page one. Initial design and ongoing management are everything.
Your best defense isn’t cynicism, it’s verification.
And that’s exactly the work we do every day.
Bill Boersma, CLU, AEP, LIC, is founder and owner of OC Consulting Group, a firm specializing in life insurance analysis, advanced case design, and litigation consulting. More information is available at www.OC-LIC.com and www.BillBoersmaOnLifeInsurance.com. He may be reached at bill@oc-lic.com or 616-456-1000.
