What Is Cost of Insurance?
The monthly charge deducted from a universal life or IUL policy's accumulated value to pay for the actual death benefit protection, based on the insured's age, health class, and coverage amount.
Understanding Cost of Insurance
Cost of insurance (COI) is the internal charge within a universal life (UL), indexed universal life (IUL), or variable universal life (VUL) policy that pays for the actual life insurance protection component of the policy. COI is calculated monthly based on the insured's current age, gender, health classification assigned during underwriting, and the net amount at risk (the difference between the death benefit and the accumulated value). As the insured ages, the COI charge typically increases because the mortality risk increases, making age the primary driver of rising COI over time.
COI charges are deducted directly from the policy's accumulated value each month, along with other administrative charges, rider costs, and premium loads. The carrier sets COI rates based on mortality tables and can adjust them within the range specified in the policy contract (between the guaranteed maximum rates and the current rates). Current COI rates are typically lower than guaranteed maximum rates, but carriers reserve the right to increase them up to the guaranteed maximum if their mortality experience or financial results warrant it. This distinction between current and guaranteed COI rates is a critical factor in evaluating long-term policy performance.
Understanding COI is essential for managing a UL or IUL policy because rising COI charges, particularly in later years when the insured is older, can rapidly deplete the accumulated value if premiums are not sufficient to offset the increasing costs. This is one of the primary reasons universal life policies can lapse in later years if they are underfunded during the early accumulation phase. A well-designed policy with adequate premium funding accounts for increasing COI charges throughout the insured's projected lifetime, including a margin for the possibility of COI rates increasing from current to guaranteed maximum levels.
The death benefit option selected also significantly affects COI charges. Under Option A (level death benefit), the net amount at risk decreases as accumulated value grows, which can help moderate COI increases. Under Option B (face amount plus accumulated value), the net amount at risk remains equal to the full face amount regardless of cash value growth, resulting in consistently higher COI charges. Understanding this relationship is important for designing a sustainable long-term policy strategy.
Important Things to Know
COI is deducted monthly from the accumulated value to pay for the death benefit protection, representing the core insurance cost within the policy.
COI increases as the insured ages due to higher mortality risk, with age being the primary factor driving rising charges over the life of the policy.
Carriers can adjust COI rates between current rates (typically lower) and guaranteed maximum rates (specified in the contract).
Rising COI charges are a primary reason underfunded UL and IUL policies lapse in later years when the insured is older.
The net amount at risk (death benefit minus accumulated value) determines the COI calculation, so higher accumulated value can reduce COI charges under Option A.
The death benefit option (A vs. B) significantly affects the net amount at risk and therefore the COI charges deducted from the accumulated value each month.
Policy owners should request updated in-force illustrations periodically to evaluate whether premiums are sufficient to cover projected COI increases.
A well-designed policy accounts for rising COI charges throughout the insured's projected lifetime, including a margin for potential rate increases to guaranteed maximums.
Seeing Cost of Insurance in Practice
Illustrative example: A 50-year-old Murfreesboro resident has an IUL policy with a $500,000 death benefit and $80,000 in accumulated value. The net amount at risk is $420,000 ($500,000 minus $80,000). The current monthly COI charge is approximately $180. By age 60, the accumulated value has grown to $150,000, reducing the net amount at risk to $350,000, but the higher mortality rate at age 60 results in a monthly COI charge of approximately $300. By age 70, if the accumulated value is $200,000, the net amount at risk is $300,000, but the age-70 mortality rate may result in a monthly COI of approximately $450. This example is illustrative only; actual COI charges vary by carrier, health class, and policy design. In a second illustrative scenario, a 55-year-old Nashville professional compares two IUL illustrations: one with Option A (level death benefit) and one with Option B (face amount plus accumulated value). Under Option A, the net amount at risk decreases as cash value grows, moderating COI increases. Under Option B, the net amount at risk stays at the full face amount, resulting in significantly higher COI charges by age 70. The cumulative difference in COI charges over 20 years can amount to tens of thousands of dollars. Actual charges vary by carrier and individual policy design.
Cost of Insurance in Tennessee
The TDCI requires carriers to disclose both current and guaranteed maximum COI rates in all policy illustrations provided to Tennessee consumers. Tennessee regulations under TCA Title 56 mandate that annual policy statements clearly show all charges deducted from the accumulated value, including COI, administrative fees, premium loads, and rider charges. This transparency ensures that Tennessee policy owners can monitor the actual cost of their coverage and compare it against the original illustration. Tennessee consumers have the right to request updated in-force illustrations showing how their policy is projected to perform under both current and guaranteed assumptions. This is particularly important for older policies where COI charges have increased significantly. The TDCI has emphasized the importance of ongoing policy review for universal life and IUL products sold in Tennessee. Agents in our network help Tennessee residents understand their COI charges, evaluate policy sustainability, and make informed decisions about premium funding levels to ensure long-term policy viability.
Explore Cost of Insurance in Detail
Get answers to specific questions about cost of insurance.
Related Glossary Terms
Accumulated Value
The total value within a universal life or indexed universal life policy, including all premiums paid, interest credited, and minus all charges and withdrawals.
Read Definition →Net Death Benefit
The actual amount paid to beneficiaries after subtracting any outstanding policy loans, unpaid premiums, and other charges from the policy's face amount or total death benefit.
Read Definition →Surrender Value
The amount a policy owner receives if they voluntarily terminate a permanent life insurance policy before its maturity or before the insured's death.
Read Definition →Indexed Universal Life (IUL)
A type of universal life insurance where cash value growth is linked to the performance of a stock market index, with a floor protecting against losses and a cap limiting gains.
Read Definition →Learn More
Frequently Asked Questions About Cost of Insurance
Yes. COI charges increase as the insured ages because mortality risk increases with age. Additionally, carriers can increase current COI rates (up to the guaranteed maximum specified in the policy contract) if their mortality experience or financial results warrant it. This dual source of potential increases is why adequate premium funding and regular policy review are critical for long-term policy performance.
Strategies include: increasing the accumulated value through higher premiums, which reduces the net amount at risk and therefore the COI calculation; choosing Option A (level death benefit) rather than Option B, which reduces the net amount at risk as cash value grows; and maintaining the best possible health classification at the time of application. Reducing the face amount also reduces the net amount at risk.
No. Your premium is the amount you pay into the policy. The cost of insurance is one of several internal charges deducted from the accumulated value to pay for the death benefit protection. Your premium must be sufficient to cover COI charges, administrative fees, and still contribute to cash value growth for the policy to remain in force long-term. The premium and COI are separate concepts.
The net amount at risk (NAR) is the difference between the death benefit and the accumulated value, representing the amount the carrier would pay from its own reserves if the insured dies. Under Option A, NAR decreases as accumulated value grows. Under Option B, NAR equals the full face amount regardless of cash value. The NAR is the basis for calculating the monthly COI charge.
Yes. While carriers typically charge current COI rates that are lower than the guaranteed maximum, they reserve the contractual right to increase rates up to the guaranteed maximum specified in the policy. This has happened in the past with some carriers and policies. Reviewing policy illustrations under guaranteed maximum assumptions provides a worst-case scenario for long-term planning.
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