Cost of Insurance in IUL

Indexed Universal Life (IUL) insurance is valued by many policyholders for its combination of flexible permanent life insurance protection and the potential for cash value accumulation linked to the performance of an external index. However, beneath this flexibility and growth potential lies an often misunderstood but critical component: the Cost of Insurance (COI).

The Cost of Insurance plays a central role in shaping both the death benefit protection and the growth of the policy’s cash value over time. It is essential for anyone considering an IUL policy—or currently holding one—to understand how the COI works, what factors influence it, and why its impact increases as the policy matures.

Summary

The Cost of Insurance (COI) in an Indexed Universal Life policy is the amount charged by the insurer each month to cover the cost of providing the policy’s death benefit. It is typically calculated based on the insured person’s age, sex, health rating, and the difference between the policy’s death benefit and its cash value. As the insured ages, the COI tends to increase, which can reduce the cash value accumulation if not properly managed. Understanding the COI and its role in the policy helps policyholders make better funding decisions and maintain long-term policy health.

What Is the Cost of Insurance (COI)?

The Cost of Insurance is the amount deducted monthly from an IUL policy’s cash value to pay for the life insurance protection itself. While the policy may also include administrative fees, rider charges, and other costs, the COI specifically covers the risk the insurer assumes by guaranteeing the death benefit.

In simple terms, the COI keeps the policy “alive” by funding the actual insurance component that will pay out upon the insured’s death.

How the COI Is Calculated

The COI is determined monthly and depends on several components:

• Net amount at risk: The difference between the policy’s death benefit and its cash value.
• COI rate: A rate determined by the insurer based on the insured’s age, sex, underwriting class (e.g., standard, preferred), and sometimes policy size.

Mathematically:

COI = (Death benefit – Cash value) × COI rate

This deduction is automatic and happens before the credited interest from index-linked growth is added to the cash value.

Factors Influencing the COI

Several variables impact the COI, including:

• Age of the insured: Older age means higher mortality risk and therefore higher COI.
• Sex: Statistically, women often have lower COI rates than men because of longer average life expectancy.
• Health rating: Better underwriting classes (e.g., preferred or super preferred) result in lower COI rates.
• Policy size: Larger death benefits may qualify for lower per-thousand COI charges, depending on the insurer.
• Policy structure: Whether the policy uses a level or increasing death benefit option can influence the net amount at risk and therefore the COI.

COI and Cash Value Growth

Because the COI is deducted directly from the policy’s cash value:

• A higher COI means less cash remains in the policy to benefit from index-linked interest credits.
• Over time, especially as the insured ages, the increasing COI can slow down or reverse cash value accumulation if the policy is not adequately funded.

This interplay makes it critical for policyholders to monitor their COI and cash value performance over the life of the policy.

Changes in COI Over Time

The COI is dynamic rather than fixed:

• As the insured ages, the COI rate naturally increases to reflect higher mortality risk.
• The net amount at risk can decrease over time as the cash value grows, partially offsetting rising rates.
• Insurers also reserve the contractual right to adjust COI rates within policy guidelines, though they cannot exceed the guaranteed maximum rates specified in the policy.

For these reasons, the COI typically starts relatively low and increases significantly in later years.

Managing and Monitoring COI

Policyholders can take several steps to manage the COI:

• Fund the policy sufficiently:Higher premium payments early on build cash value, which can reduce the net amount at risk.
• Choose an appropriate death benefit option: Switching from an increasing death benefit to a level death benefit can lower the net amount at risk.
• Review policy statements annually:Tracking how the COI and other charges affect the cash value helps prevent surprises.
• Work with a financial professional: They can model how different funding strategies affect future COI and cash value.

These actions can help ensure the policy remains sustainable and valuable in later years.

COI Compared to Other Policy Charges

While the COI is often the largest ongoing cost, an IUL policy typically includes:

• Administrative charges:Fees for recordkeeping and policy servicing.
• Rider charges: Costs for optional benefits such as waiver of premium or accelerated death benefit.
• Premium load:A percentage deducted from each premium payment before it is credited to the cash value.

Together, these charges reduce the cash value accumulation, but the COI usually represents the most significant long-term cost. You can book a free strategy session with us at seventi102 Life. We will be glad to be of assistance and help you navigate the intricacies of your policy to tailor it to your specific needs and avoid mistakes that might make the venture unprofitable.

Conclusion

The Cost of Insurance is a vital yet often overlooked element of an Indexed Universal Life policy. It funds the death benefit protection that defines the policy as life insurance, but it also directly affects how much cash value the policy can build over time.

By understanding how the COI is calculated, what factors influence it, and how it changes as the policy matures, policyholders can make better funding decisions and actively manage their policies to ensure they remain both affordable and beneficial throughout their lifetime.

Indexed Universal Life Insurance(IUL) policies have a lot of features that can potentially provide a safety net for you and for your loved ones. You should check out this video on how to safeguard your future and that of your loved ones against unforseen circumstances like job loss or illnesses.

FAQs

Question 1: Why does the Cost of Insurance increase over time?

Answer: The COI increases as the insured ages because mortality risk naturally rises, leading to higher insurance costs.

Question 2: Can the insurer change my COI rates?

Answer: Insurers can adjust the COI within limits, but they cannot exceed the guaranteed maximum COI rates outlined in the policy.

Question 3: How does the death benefit option affect the COI?

Answer: An increasing death benefit keeps the net amount at risk higher, leading to higher COI charges, while a level death benefit can reduce the net amount at risk over time.

Question 4: What happens if my cash value is not enough to cover the COI?

Answer: If the cash value cannot cover the COI and other charges, the policy may lapse unless the policyholder pays additional premiums.

Question 5: Can I see the COI in my policy statement?

Answer: Yes, most annual or monthly statements show the COI charges deducted from the policy’s cash value.

We hope you gained much from this article. Our previous article was on risk management in an IUL policy.  You can check it out as it contains a lot of valuable information.