Cost of Insurance
Cost of insurance (COI) is the monthly charge deducted from the cash value of a universal life insurance policy to cover the pure mortality risk, calculated by multiplying the applicable mortality rate by the policy's net amount at risk.
Cost of insurance is the mechanism by which universal life insurance products — including standard universal life (UL), indexed universal life (IUL), and variable universal life (VUL) — separately account for the mortality protection component of the contract. Unlike traditional whole life insurance, where the pricing of death protection is bundled into a level premium, universal life uses an unbundled structure where the COI is an explicit, periodic deduction from the policy's cash value account. This transparency allows policyholders to see exactly what they are paying for mortality coverage in any given month.
The COI rate is expressed as a charge per $1,000 of net amount at risk and is drawn from the insurer's internal mortality tables, which are typically based on standardized industry data such as the 2001 or 2017 CSO tables, adjusted for the insurer's own experience. The COI per $1,000 of NAR increases each year as the insured ages, reflecting higher mortality probability. The total monthly COI charge is therefore the COI rate multiplied by the NAR, and it can change materially over the policy's lifetime as both the rate and the NAR evolve.
Insurers publish maximum guaranteed COI rates in the policy contract, but many charge current rates that are lower than the contractual maximum. Current COI rates can be reduced at insurer discretion when actual mortality experience is favorable, which is a mechanism used to make policies more competitive. However, if the insurer's mortality experience deteriorates, it can raise current COI rates up to the contractual maximum — a risk that policyholders should understand, particularly for policies held for decades. Material increases in COI rates have been a source of policyholder complaints and regulatory scrutiny in the industry.
For any universal life policy to remain in force, the cash value must be sufficient to pay the COI and any other monthly deductions (administrative charges, rider costs) each month. If the cash value is depleted to zero, the policy lapses unless a no-lapse guarantee rider is in place. This means that policies funded with insufficient premiums or experiencing poor cash value performance can lapse even after decades of payments — a scenario sometimes called a lapse-at-worst-possible-time risk that has generated significant consumer complaints and regulatory attention.
Understanding COI mechanics is essential for evaluating universal life policy illustrations. An illustration that shows the policy remaining in force to age 100 or 121 may depend on favorable current COI rates that are not guaranteed. Stress-testing an illustration at guaranteed COI rates reveals the worst-case scenario and provides a more complete picture of policy durability.