Cost of insurance (COI)

The cost of insurance is the charge a universal life, indexed universal life or variable universal life policy takes from the account value each month to pay for pure death benefit protection. It is separate from premium loads and administrative fees, and it is often the largest charge in the policy, especially at older ages.

The monthly charge is the COI rate times the net amount at risk, the difference between the death benefit and the account value. Formula: COI charge = (death benefit − account value) ÷ 1,000 × monthly rate per $1,000. Hypothetical example: with a $500,000 death benefit, $100,000 of account value and a rate of $0.80 per $1,000, the monthly charge is $320. Rates rise each year with attained age, and the policy states a guaranteed maximum rate.

Insurers set current COI rates below the guaranteed maximums and can raise them toward those maximums if their mortality, interest or expense expectations change, as several large insurers did in the 2010s, leading to class-action lawsuits. Rising COI charges are a leading reason universal life policies lapse in later years, especially underfunded ones. An in-force illustration shows how charges will affect your policy. See universal life cost-of-insurance increases and what to do and why universal life policies lapse, and how to prevent it.