How cost-of-insurance disputes begin in the contract language

Almost every cost-of-insurance dispute starts with a sentence in a contract that was written decades before anyone argued about it. The sentence says, in some form, that the insurer will set the monthly charge for the death benefit based on its expectations about the future, and that the charge will never exceed a table of maximum rates. Whether a particular increase was allowed then depends on the exact words, on what the insurer actually did, and on whether those two things match. This post explains the mechanism from the contract outward: the charge itself, the gap between guaranteed and current rates, the factors a contract may name, and the points at which a gap between wording and practice turns into a complaint, a class action or a settlement.

It describes how disputes arise, not who is right in any of them. Settlements are not findings of wrongdoing, courts have gone different ways depending on the contract, and no part of this post predicts what would happen with your policy. For legal questions about your own contract, an attorney who handles insurance disputes is the right reader.

What the charge is

A universal life policy has a pool of money, the account value, and a death benefit. Each month the insurer deducts several charges from the account. The largest and most variable is the cost of insurance, or COI. It pays for the death benefit protection: the insurer's risk is the difference between the death benefit and the account value, called the net amount at risk.

The monthly charge is:

COI charge = (COI rate per $1,000 ÷ 1,000) × net amount at risk

or equivalently, the rate multiplied by the number of thousands of dollars at risk. The COI rate increases with the insured's age, because the chance of dying in a year rises, and it depends on the rate class assigned at underwriting. The guide to how universal life insurance works shows where the charge sits among the policy's other deductions.

A hypothetical, with invented rates. Say a policy has a $250,000 death benefit and a $50,000 account value, so the net amount at risk is $250,000 − $50,000 = $200,000, or 200 thousand-dollar units. If the current monthly rate is $0.50 per $1,000, the charge is 200 × $0.50 = $100 a month, or $1,200 a year.

Two sets of rates: the ceiling and the price

The contract does not state one COI rate. It states two ideas.

• The guaranteed maximum rates, printed in a schedule in the policy, usually derived from a standard mortality table. They are the ceiling. The insurer promises never to charge more than these.
• The current rates, which the insurer actually charges, are normally lower. They are a non-guaranteed element: the insurer may change them, up or down, within the ceiling, under the conditions in the contract.

Say the schedule's guaranteed maximum for this insured, at this age, is $1.10 per $1,000 a month. Then the ceiling charge on the same net amount at risk is 200 × $1.10 = $220 a month, or $2,640 a year, compared with the current $1,200. The ceiling is 1.10 ÷ 0.50 = 2.2 times the current rate. That space between price and ceiling is the room in which the insurer may move, and it is where every dispute lives. A rate increase that stays below the ceiling is not automatically allowed; it is allowed only if it was made in the way the contract says.

An illustration may be built on either, and a good one shows both. The how to request and read an in-force illustration guide covers how to ask for projections at current and at guaranteed charges, and guaranteed vs non-guaranteed values in a policy illustration explains the general difference between the columns.

The sentence that matters: how may the rate change?

Look for a provision headed something like "Cost of Insurance Rates." In many contracts it says, in substance, that current rates are determined by the insurer from time to time, based on its expectations of future factors, within the guaranteed maximum. Here are two invented clauses of the kind that appear in the market, to show how small word differences change the dispute.

Clause A (broad, invented): "We determine cost of insurance rates based on our expectations of future mortality, investment earnings, expenses and persistency. Rates will not exceed the guaranteed maximum rates."

Clause B (narrow, invented): "We determine cost of insurance rates based on our expectation of future mortality. Rates will not exceed the guaranteed maximum rates."

Under clause A, an insurer that finds lower investment returns or higher expenses than it assumed when it priced the policy can point to contract language that lists those factors. Under clause B, the question is whether an increase driven by anything other than expected mortality complies. Both clauses might be called ordinary. They create different arguments.

The factors often named include:

• Mortality: how many insureds die, compared with the assumptions. Insurers have pointed to longer-than-expected lives in some blocks of policies as a cost, since a policy that stays in force longer reaches older ages with higher charges. Whether a given change in mortality justifies a given increase is itself a point of argument.
• Investment earnings: what the insurer earns on the assets backing the policies. Lower interest rates reduce earnings.
• Expenses: the cost of administering the policies.
• Persistency: how many policyholders keep the policies. If fewer people lapse than the insurer assumed, the insurer pays more death claims on old policies than it expected. See persistency and lapse-supported pricing.

A contract may also be silent, or ambiguous, or contain a requirement that rates be applied on a "non-discriminatory basis" or by class. Each phrase is a possible point of argument later.

How a gap between wording and practice becomes a dispute

A COI dispute generally needs three ingredients: a contract promise, a practice that appears to depart from it, and a policyholder who notices. The steps tend to run as follows.

1. The policy is sold and priced. The insurer sets its assumptions, often in a period of higher interest rates and shorter assumed lifespans than later turned out to be the case. The contract says current rates will follow expectations.
2. Experience diverges. Investment returns fall, people live longer than assumed, fewer policies lapse than assumed, or expenses change. The block of policies becomes less profitable than priced.
3. The insurer changes the rates. It may raise the current COI rate for a group, such as policies of a certain vintage, size or issue age. It explains the change, often in a notice, in terms of the factors in the contract.
4. The policyholder sees the effect. The annual statement shows higher deductions. The account value drops faster, and a projection that once ran to age 95 now ends at 82. See why universal life policies lapse, and how to prevent it for how a policy comes to fail.
5. The question is framed. Was the increase based only on the factors the contract allows? Did it reflect an expectation of future experience, or recovery of earlier shortfalls? Were all insureds treated alike, or were certain groups singled out?
6. The dispute takes a form. It might be a complaint to the state insurance department, a letter from an attorney, an individual lawsuit, or a class action covering many policyholders with the same form.

The insurer's answer is usually that the contract gives it discretion, that its experience changed in ways the contract lists, and that the increase was actuarially supported. Policyholders' answers are that the contract limits the factors, that the increase relied on others, or that it was designed to recoup past pricing mistakes. Courts have decided these arguments differently on different contracts, which is why outcomes are mixed.

The recurring claims

According to a WilmerHale client alert on the litigation (April 2016), summarized in cost-of-insurance lawsuits against life insurers: cases and outcomes, the repeated theories include:

• Breach of contract: the increase used factors the policy does not permit.
• Use of non-mortality factors: for example, recovering profit margins or earlier pricing shortfalls instead of reacting to a change in expected mortality.
• Discriminatory increases: allegations that increases targeted older insureds or large policies without an underwriting basis.
• Related claims: breach of the duty of good faith and fair dealing, and in some cases fraud or misrepresentation.

The documented results vary. The guide on this site lists settlements and verdicts with their sources and dates, including a 2018 Transamerica settlement of $195 million, an AXA Equitable settlement of $307.5 million, a June 2018 jury verdict of about $34.3 million against State Farm Life that the Eighth Circuit affirmed in 2020, and others. It also notes that on August 11, 2026 the Second Circuit reversed the certification of a $147.5 million settlement class involving Lincoln and Connecticut General and sent the case back, so that matter was not final as of the guide's October 2026 status date. Check life insurance class actions: documented cases and what they paid and the court docket for the current position, because status changes.

Two cautions. These are public-record outcomes, and none predicts a result on a different contract. And a settlement, with its release and deadlines, is a legal event with consequences for your rights; read any notice you receive and talk to an attorney before opting out or signing.

Why the dispute often sits in the details

Four details separate cases that look alike on the surface.

The vintage of the policy. Contracts changed over the decades, and the clause in a 1990 policy may differ from the one in a 2005 policy. A complaint that fits one contract may not fit another.

Who the policyholder is. Cases have involved ordinary consumers, trusts and investors who bought policies from the original owners, and the different positions can matter for who may bring a claim and for what class a court will certify.

How the increase was applied. An across-the-board change is a different question from one targeted at an age band or face amount.

What the insurer actually said. The notice that accompanied a rate change, the filings made with regulators in states that require them, and internal documents obtained in a lawsuit all shape what the insurer must justify.

A short walk through one hypothetical notice

To make the steps concrete, imagine a hypothetical policyholder, Ruth, 71, who owns a universal life policy bought in the 1990s. Her annual statement arrives with a cover letter: current cost of insurance rates will rise on her policy by a stated percentage "to reflect the company's current expectations." She does four things in order.

First, she finds the cost-of-insurance provision in her contract and reads which factors it lists. Second, she compares the new current rate with the guaranteed maximum in the schedule, and sees that the increase leaves the rate well under the ceiling, so the ceiling is not the issue. Third, she requests an in-force illustration at the new rate and at guaranteed charges, which shows that at her present premium the account is projected to run out earlier than before. Fourth, she sets two questions apart. The first is practical: what can she afford to do about the policy? The second is legal: was this increase made in the way her clause permits? She takes the second to an attorney with the contract, the notice and the statements, and gets an answer about her rights and any deadlines, while the first question keeps moving on its own timetable.

Ruth's approach is the right order for most people. The legal question may take years to answer, if it is ever worth asking, and the account balance does not wait.

What to do with this as a policyholder

You do not need to read case law to protect yourself. A short process:

1. Find the clause. Locate the "cost of insurance rates" provision and the schedule of guaranteed maximum rates in your contract. Note which factors are listed and whether the rates are said to apply by class.
2. Read your annual statement. Check the COI deductions and compare them with last year. a universal life annual statement checklist: ten things to verify goes through the items to verify.
3. Ask for the history. Request the COI rates applied to your policy by year, and an in-force illustration at current and at guaranteed charges, in writing.
4. If you receive an increase notice, act on the policy first: price the options (more premium, a lower death benefit, an alternative) with universal life cost-of-insurance increases and what to do and your universal life projection shows a shortfall: a response plan. Whether the increase was proper is a second question and does not stop the account from running down while you wait.
5. Keep records, including every notice and statement.
6. Ask professionals. A state insurance department can say whether it has seen complaints; an attorney can tell you whether the clause supports a claim and what deadlines apply (when to hire a life insurance lawyer); a fee-only planner or insurance consultant can read the contract without a commission interest.

What a dispute does not tell you

It does not mean the product is bad. A universal life policy that is properly funded and priced can do what it was built to do, and an increase within the contract's terms is not wrongdoing. It also does not mean you will be paid. Most policyholders will never be part of a lawsuit, and the one reliable protection is understanding what your own contract says, which is mostly a matter of reading one paragraph and one table.

It does show, though, why the "non-guaranteed" label on current rates is more than a formality. The insurer is permitted to change them, and the contract's words decide how. A buyer who understands that before signing, and keeps the contract and statements afterward, is better placed than one who assumes the first-year cost will hold.

Key takeaways

• The COI charge is the rate per $1,000 times the net amount at risk; in the invented example, $0.50 gives $100 a month, and a $1.10 guaranteed maximum would mean $220.
• The contract has a ceiling (guaranteed maximum rates) and a price (current rates); disputes arise in the space between, about whether a change followed the contract's stated factors.
• Small wording differences, such as a clause naming mortality alone versus mortality, investment earnings, expenses and persistency, change the argument.
• Recurring claims allege non-permitted factors, recovery of past shortfalls or targeting of older or larger policies; outcomes have varied, and settlements are not findings of wrongdoing.
• Read your clause and schedule, check your statement each year, ask for an in-force illustration, and consult an attorney before signing a release or opting out of a class settlement.