Cost of Insurance
The pure insurance cost within a life insurance policy, representing the amount deducted to pay for the actual insurance protection. This is separate from premium amounts that go toward cash value accumulation or administrative fees.
Example
“When reviewing his whole life policy statement, Marcus noticed the cost of insurance had increased as he aged, while his premium remained level.”
Memory Tip
Think 'COI' - the Cost Of Insurance is what you pay just for being Covered On Insurance, not for savings or extras.
Why It Matters
Understanding cost of insurance helps policyholders see exactly how much they're paying for pure life insurance protection versus investment features. This transparency allows for better comparison shopping and helps explain why policy values may fluctuate over time.
Common Misconception
Many people think their entire premium goes toward insurance protection, but in permanent policies, only the cost of insurance covers the death benefit. The remainder typically goes toward cash value accumulation, which acts more like a savings or investment account within the policy.
In Practice
A 45-year-old man with a $500,000 universal life policy might pay a $3,000 annual premium. Of this amount, perhaps $800 represents the actual cost of insurance for his age and health, while $2,000 goes into the cash value account, and $200 covers administrative fees. As he ages to 55, his cost of insurance might increase to $1,200 annually, but his premium could remain the same, with less money going toward cash value accumulation.
Etymology
Developed in the mid-20th century as insurance companies began separating the protection element from investment components in permanent life insurance policies.
Common Misspellings
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Related Terms
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See Also
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