Cost Of Insurance
What Does Cost Of Insurance Mean?
The cost of insurance (COI) refers to the monthly charge an insurer deducts to cover the risk of providing life insurance coverage, including mortality, administrative fees, and other expenses. It is most common in variable and universal life insurance policies and varies based on factors like age, health, gender, occupation, and lifestyle.
Insuranceopedia Explains Cost Of Insurance
Understanding the Cost of Insurance (COI)
The cost of insurance is not the same as your insurance premium. While a premium is the total amount you pay, the COI is the portion that covers the actual insurance risk. This includes:
- Mortality risk – the likelihood of the insured passing away.
- Administrative costs – policy maintenance and underwriting.
- Insurer’s profit margin.
In universal life insurance, the COI is deducted from the policy’s cash value each month.
Key Factors That Affect the Cost of Insurance
1. Age
Age is the most significant factor in determining your cost of insurance. As people age, the risk of illness and death increases. Therefore:
- Younger individuals generally pay lower COI.
- Older applicants face higher charges due to shorter life expectancy.
- Many insurers underwrite policies primarily based on age.
For example, a 30-year-old will almost always have a lower cost of insurance than a 60-year-old for the same coverage.
2. Health Status
Health plays a critical role in insurance pricing. Poor health increases risk, and higher risk leads to higher COI.
Insurers often look at:
- Pre-existing conditions (e.g., diabetes, heart disease, cancer)
- Medical history (stroke, surgeries, hospitalizations)
- Family history of serious illness
- Body Mass Index (BMI)
- Tobacco or nicotine use
Applicants in good health may qualify for preferred rates, resulting in lower cost of insurance.
3. Medical Exams and Questionnaires
To assess your health, insurers may:
- Require a simple online health questionnaire (for younger or low-risk applicants)
- Request a doctor’s note or medical exam (common for older or high-risk individuals)
These assessments help insurers assign a risk class, which directly impacts your monthly COI.
4. Occupation and Lifestyle
High-risk occupations and hobbies increase the chance of injury or death, raising your insurance costs.
Examples:
- High-risk jobs: Construction workers, firefighters, pilots, miners
- Dangerous hobbies: Skydiving, scuba diving, racing, rock climbing
People in these categories often pay more for life insurance coverage.
5. Gender
Gender also influences the cost of insurance:
- Women generally live longer than men.
- As a result, women typically pay 10–25% less for life insurance compared to men.
How Is the Cost of Insurance Charged?
In most universal life policies, the COI is deducted monthly from the policy’s accumulated cash value. If the cash value drops too low to cover the COI and other fees, the policy may lapse unless additional premiums are paid.
Final Thoughts: Why Knowing Your Cost of Insurance Matters
Understanding the cost of insurance helps you:
- See where your money is going.
- Make better decisions when choosing a policy.
- Compare policies more accurately.
- Avoid policy lapses due to unexpected charges.
If you’re considering a universal or variable life insurance policy, always ask your insurer for a COI breakdown. It can make a huge difference in your long-term financial planning.
FAQs
Is the cost of insurance fixed?
No. It can increase over time, especially as you age or if your health deteriorates.
Can I lower my cost of insurance?
Yes. Maintaining good health, avoiding tobacco, and applying at a younger age can help.
Is COI applicable to all life insurance types?
No. COI is mainly associated with universal and variable life insurance. Traditional whole life or term life policies bundle costs into a fixed premium.
