VUL Charges: Premium Charge, Policy Fee, Administration Charge, Cost of Insurance and Surrender Charge

Definition: VUL Charges Fall into Two Layers and About Nine Common Types

VUL charges are the costs deducted from the account value to pay for protection, policy administration, asset custody and investment management. There are two layers. Policy-level charges are collected by the insurer and set out in the product summary and policy contract. Asset-level charges are collected by the custodian and the asset manager under their agreements and are likewise deducted from the policy account. The difference from a retail investment-linked policy (ILP) is that most retail ILP charges are collected through bid-offer spreads, premium allocation rates and the selling of units (MoneySense, 2026-09-28), whereas most high-net-worth VUL charges are explicit percentages deducted directly from the account, and some of them can be agreed within a range at inception.

The above are common forms in the Singapore market. Specific rates, durations and adjustment terms are governed by the product summary and policy contract. This article does not quote any product's rates, and any figures that appear are hypothetical illustrations of how a calculation works, not quotations.

Premium Charge and Policy Fee: Front-end Costs Based on Premium

The premium charge is deducted once, when premium enters the account. Some high-net-worth products allow the rate to be chosen within a range at inception. Top-up premiums may be exempt from the premium charge within an annual allowance, with the excess charged at the agreed rate (per the product summary). The charge reflects distribution and set-up costs: MoneySense states plainly that ILP charges include distribution costs such as commission, and the same holds for a high-net-worth VUL.

The policy fee is a fixed percentage of the initial premium, annualised and deducted in instalments, and it stops after a number of policy years. It differs from the administration charge in that its basis is the initial premium rather than account value, so when the account falls, its relative burden rises; when the account rises, it does not rise with it.

A useful habit when reading these two charges is to convert them into "percentage of account value per year for the first several years" and check them year by year against the Table of Deductions in the benefit illustration. The sum of the two sets the policy's starting line in the early years: the account has to recover this cost before growth is worth discussing.

Administration Charge and Asset-level Charges: Ongoing Costs Based on Account Value

What these charges have in common is that they are collected continuously on account value or asset size, so they erode the account over time through compounding. An illustration (not a quotation): suppose the account value is 10 million (policy currency) and the administration charge, custody fee and management fee together come to 1% a year. About 100,000 is then deducted each year, and about 1 million over ten years, plus the returns that money could otherwise have earned. This is why, when comparing VULs, asset-level charges must be added to policy-level charges rather than looking only at the insurer's charge table.

Cost of Insurance (COI): Why It Is Based on the Net Amount at Risk, Not the Full Sum Assured

The net amount at risk (also called the sum at risk) equals the base sum assured minus the account value. Under a full medical underwriting policy, the only death risk the insurer actually carries is this difference: the account value already belongs to the policy and is paid out with the benefit on death, so the cost of insurance is charged only on the difference.

An illustration (not a quotation): with a base sum assured of 10 million and an account value of 7 million, COI for the period is charged on a net amount at risk of 3 million. If the account value rises to 11 million, the net amount at risk is zero and no COI is charged for that period. Under a guaranteed issue policy the death benefit is "account value plus a fixed amount", and COI is charged on that fixed amount.

COI rates depend on age, sex, smoker status, country of residence and underwriting results, and rise with age (MoneySense describes the protection charge on an ILP as rising with age). A policy with several lives assured is charged at joint rates. The rate table is normally not guaranteed, and the insurer may adjust it as the contract allows.

This mechanism produces a VUL-specific double sensitivity. When the market falls, account value falls, the net amount at risk rises, COI rises with it, and the account is drawn down further. The larger the sum assured, the smaller the account and the older the life assured, the stronger the effect. This is the key to judging whether a VUL can be sustained under adverse scenarios.

Partial Withdrawal Charge and Surrender Charge

The surrender charge is a percentage of the initial premium, highest in year one, declining each year and falling to zero after the agreed year. It is highest in the early years because the insurer has already paid distribution and set-up costs at issue, which the front-end premium charge and policy fee have not fully covered. This is also why the statement that surrendering early may return less than the premiums paid must be written into product documents.

Partial withdrawals usually come with one free allowance a year (commonly worded as a percentage of the prior year-end account value, with a cap). Beyond that a fixed fee applies each time, and after a withdrawal the minimum cash ratio and minimum account value must still be met. The free allowance is not the maximum you can withdraw.

The free-look period: MoneySense states that all life insurers give a 14-day free-look period from receipt of the policy documents, and that for ordinary life insurance the premiums paid are refunded less costs such as medical examination fees (MoneySense, 2026-05-11). For a high-net-worth VUL, because assets have already been transferred in, the common practice is to refund the account value after deducting underwriting costs, taxes and the cost of realising assets; the policy terms prevail.

Can Charges Change, and How Are You Notified

MoneySense cautions that ILP fees and charges may not be guaranteed and may change, and this applies equally to a VUL. Common practice in the Singapore market is as follows:

• Fixed at inception: the premium charge, the policy fee rate and the surrender charge schedule. Once written into the policy these are generally not adjusted.
• Adjustable: the administration charge, the COI rate table and the partial withdrawal fee. The insurer may adjust them as the contract allows and must give the policy owner advance written notice (notice period per the contract).
• Set by third-party agreements: custody and management fees change with the agreements with the custodian and manager; changing the manager means agreeing fees afresh.

A benefit illustration uses current charges. The LIA member guidance (undated; it applies to protection-oriented single-premium and recurrent single-premium ILPs and to regular-premium ILPs) requires an illustration to state that it is based on current charges and fees. In other words, the illustration itself already warns the reader that a charge increase would make actual results worse than illustrated. Before signing, ask the insurer three questions: which charges are guaranteed by the contract, what the cap and notice period are for adjustable charges, and whether charge changes will be reflected in updated illustrations.

What Happens When the Account Cannot Cover Charges

A failed deduction usually unfolds in this order:

1. The account's cash cannot cover the current charges, and the insurer sells assets in the account to top up cash, as the contract provides.
2. If the account value falls below the minimum account value as a result, the insurer notifies the policy owner to add funds within the grace period.
3. The shortfall may first be recorded as a debt, to be deducted later from the account or the death benefit.
4. If it is not made up within the grace period, the policy terminates, cover ends, and charges already deducted are not refunded.

The LIA member guidance requires the illustration for a protection-oriented single-premium ILP (a GIO-type VUL with a low sum assured may have no illustration) to include the statement that the policy value may fall to zero, in which case the policy will terminate, and to note that lapse can be avoided by adding premium. The combination most likely to get this far is low-dividend or low-coupon underlying assets, a sum assured that is high relative to the account size, an older life assured, and then a market fall or successive withdrawals on top. The monthly account statement is the earliest warning signal.

How to Read Charges: A Three-step Check

1. Obtain the documents: illustrations for all three scenarios (including the 0% column), the table of deductions, the charges section of the product summary, and the custody and management fee quotations.
2. Use a common basis: convert all charges to the same base (for example, an annualised percentage of account value) and look at the first few years and the long term separately.
3. Stress test: assume the account falls 30%, adjustable charges rise and withdrawals are taken for two consecutive years, and see in which year the cash ratio and the minimum account value are breached.

Charges alone are not the only test of whether a VUL is good: what they buy is lifelong cover, investment autonomy and structural arrangements. But without understanding the charges, you cannot judge whether those arrangements are worth it. For an interpretation that takes your personal circumstances into account, you can register your requirements through the contact channels on this site.