What is the Cost of Insurance?
In life insurance, the cost of insurance (COI) is an ever-changing amount that describes the money the life insurer needs to cover policy costs and administration for that specific insured. In short, it’s the amount of money required to keep the policy in force.
Calculating the cost of insurance
To calculate the COI, insurers consider all of the costs required to keep your policy in effect. Because their risk increases as you get older, your COI goes up with age.
You aren’t the only factor affecting COI, though. Most insurers wrap things like policy administration expenses into their COI calculations.
COI in universal and variable universal life insurance
With most life insurance policies, you probably won’t care much about the COI. You know that you need to pay your set premium to keep your policy active, so it’s pretty simple.
But if you bought universal or variable universal life insurance, you’ll probably feel a little differently. These types of life insurance give you flexible premiums, up to a point. Specifically, you always need to pay enough to cover the COI, which will increase over the years. Any extra premium payment you make beyond that accumulates in your policy’s cash value.
If you’re committed to growing your cash value, you’ll want to keep an eye on your COI to ensure you’re making sufficient premium payments to have leftover money go into your cash value.