What is Cost of Insurance (COI)?
Cost of Insurance (COI) refers to the fee that an insurance company charges policyholders for the risk of providing life insurance coverage. This cost is especially relevant in policies like Indexed Universal Life (IUL) or Universal Life insurance, where COI directly impacts the cash value accumulation. The COI is generally deducted monthly from the policy’s cash value to maintain the death benefit coverage.
COI is determined by several factors, including the policyholder’s age, health, gender, the amount of the death benefit, and the length of coverage. As the insured person ages, the COI usually increases since the risk of death rises. For example, a younger policyholder might have a lower COI, allowing more of their premiums to contribute to the policy’s cash value, while older policyholders face higher COI, reducing potential cash growth.
In life insurance, particularly IUL and Whole Life policies, understanding the COI is critical for managing long-term financial expectations. If the COI rises significantly over time, it can affect the policy’s cash value performance and may require higher premiums to maintain the desired level of coverage. Many insurance companies provide projections of COI changes, but actual costs can vary, so it’s essential to monitor COI charges periodically.
Careful consideration of COI helps policyholders optimize cash value growth and ensures the policy remains sustainable over the long term.