The advent of no-load mutual funds provided investors with an avenue of diversification and portfolio management that didn't charge sales loads or commissions. Although this breed of fund has hardly replaced those that contain sales charges in the mutual fund world, they opened the way for other types of no-load products, such as life insurance and annuities. These products are similar to traditional policies and contracts, except that they charge much lower fees and expenses. This article explores the characteristics of no-load life insurance and annuity contracts and their advantages and disadvantages. (For a background reading, see The Lowdown On No-Load Mutual Funds.)
These contracts resemble traditional annuity contracts in many ways, except that they charge lower fees and usually do not contain sales charges of any kind for withdrawals made within the first few years. Conventional annuities usually contain a declining back-end sales charge schedule that can last for up to 10 years, or even longer in some cases. Most no-load annuity contracts are offered directly by the issuing carrier to the public, although agents and brokers can market them as well. However, most no-load annuity contracts still charge some fees, such as mortality and expense fees, and investment management fees in variable contracts. But these fees are typically much less than those charged by conventional annuities. For example, the average variable annuity charges an M&E fee of approximately 1.5%, while a no-load annuity might only charge two-tenths of a percent. Fees charged by variable subaccounts tend to be about the same, but no-load annuities usually don't charge 12b-1 fees like conventional contracts, because these fees usually cover marketing and distribution expenses.
No-Load Life Insurance
As with annuities, no-load life insurance charges much lower fees than traditional policies. The payments for no-load policies are much less during the first year than comparable policies that pay an agent or broker a commission. Most no-load policies also have no cash surrender fees, and they often also allow for earlier access to any cash value in the policy. No-load life insurance is also sometimes referred to as low-load insurance, which technically can charge a low level of fees in addition to the premium. However, the terms are largely interchangeable. No-load policies are available for every type of life insurance: term, whole, universal and variable universal. (To learn more, see Intro To Insurance: Types Of Life Insurance.)
Because no- and low-load insurance and annuity products do not pay the selling agent or broker a commission of any kind, they are often used extensively by fee-based advisors and planners. However, the planner may charge a separate fee for recommending the product and servicing it once it's in force. But the fees charged by these planners and agents are still typically much less than what conventional policyholders will pay in commissions. This is another reason why no-load products are sometimes called low-load products, because the latter term takes these fees into account.
Advantages and Disadvantages
The lower fees charged by no-load products are obviously their biggest benefit. Furthermore, the absence of commissions allows the cash value inside no-load life insurance policies to grow faster and become accessible sooner than in conventional policies, and with lower premiums. But the lower fees charged by these products also pose some disadvantages to contract holders and policy owners. Because they are usually issued directly by the insurance carrier, there may not be an agent available to directly service the policy or contract, unless it has been sold by a fee-based agent as described above. Otherwise, customers will have only a customer service representative to assist them with their policies and contracts.
As might be expected, no-load products are also typically no-frills vehicles that do not offer many of the amenities found in traditional products. For example, no-load variable annuities and variable life insurance products usually do not offer money-management services of any kind, such as asset allocation, dollar-cost averaging or portfolio rebalancing. They also lack most of the riders offered by conventional policies and contracts, such as guaranteed minimum income benefits, guaranteed minimum withdrawal benefits, lifetime income benefits or death benefits with a roll-up feature. (For more, read Let Life Insurance Riders Drive Your Coverage.)
When Should No-Load Annuities and Life Insurance be Used?
The appropriateness of no-load products is largely determined by the level of sophistication of the consumer. Just as with no-load mutual funds, no load life insurance and annuities are appropriate for those who do not need an advisor to tell them the amount and type of coverage that they need, or how to make changes or modifications to their policies and contracts. Customers that do not need the services of an agent or broker can therefore benefit from the reduced cost of no-load products.
Although no-load annuities and life insurance policies cost much less than their traditional counterparts, they also lack many of the features that are found in conventional policies, such as income and death benefit riders and money management and asset allocation tools. The pros and cons of this unique breed of policies and contracts should be weighed carefully by consumers before purchasing. For more information on these products, consult your financial advisor or contact a no-load insurance carrier. (For more, see Find The Right Financial Advisor.)