What Are Cost of Insurance Charges in Life Insurance?

Cost of insurance charges in a life insurance policy are the monthly deductions your insurer takes from the policy’s cash value to pay for the death benefit itself. In a universal life contract, they are the actual price of the coverage, separated from the savings side of the policy. They start small, climb every year as you age, and if they outrun what’s in your cash value, the policy lapses.

Which Policies Have a Separate COI Charge

You see COI as its own line item in universal life, variable universal life, and indexed universal life policies. Traditional whole life insurance builds the same mortality cost into a level premium, so it’s never itemized on a statement. The unbundled structure of universal life is what gives you flexible premiums and an adjustable death benefit, and it’s also why the carrier reaches into your cash value every month whether you paid a premium that month or not.

That transparency puts the burden on you. The cash value has to cover the monthly COI deduction plus administrative loads, and it will shrink by that amount even in months when you skip a premium or your investments drop. Under the NAIC Life Insurance Illustrations Model Regulation, insurers must warn you in your annual statement if the account won’t sustain the policy through the next reporting period at guaranteed rates.¹ That notice is the last guardrail before a lapse, and it’s easy to miss.

How the Monthly Charge Is Calculated

The engine of the calculation is the net amount at risk: your death benefit minus your current cash value. The insurer only charges you for the gap between what it would owe your beneficiaries and what the account already holds. A $1 million policy with $400,000 in cash value has a net amount at risk of $600,000, because $400,000 of the payout is already your money.

The carrier multiplies that net amount at risk by a mortality rate, usually quoted as a cost per $1,000 of coverage. At a rate of $0.20 per $1,000, a $600,000 net amount at risk produces a $120 monthly COI charge. The rate itself comes from mortality tables keyed to your age, gender, health classification, and smoking status. New policies written since January 2020 use the 2017 Commissioners Standard Ordinary mortality table for reserves and minimum nonforfeiture values.²

Mortality isn’t the only thing bundled into the deductions. Administrative expense loads cover underwriting, policy maintenance, and claims processing, and state premium taxes get passed through either as a separate line or folded into the COI rate. The NAIC treats mortality charges and expense charges as separate nonguaranteed elements, and actuaries have to set experience factors for each independently.¹

How Your Death Benefit Option Changes the Math

Universal life policies usually offer two death benefit structures, and the choice directly controls how fast the net amount at risk grows.

Under Option A, a level death benefit, your beneficiaries receive a fixed dollar amount. As cash value accumulates, the insurer’s liability shrinks, the net amount at risk shrinks with it, and COI charges grow more slowly. Under Option B, an increasing death benefit, beneficiaries receive the face amount plus the accumulated cash value, so the net amount at risk stays near the full face amount and COI runs higher at every age. Switching from Option B to Option A later in the policy’s life is one of the most effective ways to slow rising COI, because the change immediately alters the net amount at risk the carrier deducts against.³

Why COI Climbs as You Age

Your attained age is the largest driver of rising COI. Mortality rates follow a steep curve: relatively flat through your 40s and 50s, noticeably steeper in your 60s, and sharply accelerating in your 70s and 80s. A charge that costs $50 a month at age 55 can hit $300 or more by age 75 with nothing else about the policy changing. The underlying probability of death at 75 is simply much higher than at 55.

Age isn’t the only pressure. Several things can lift the charge even before the mortality curve really kicks in:

Poor investment performance. A market downturn in a variable universal life policy reduces cash value, widens the gap between the death benefit and the account balance, and pushes the net amount at risk up.
Policy loans. Borrowing against the cash value shrinks the balance available to offset the death benefit. A policy with $300,000 in cash value and $100,000 in outstanding loans has a much smaller effective cash value for COI purposes.
Partial withdrawals. Pulling money out permanently lowers the cash value with the same effect as a bad investment year.

The feedback loop is what catches people. A bad year reduces cash value, which raises COI, which drains cash value faster, which raises COI again. A policy can slide toward lapse much faster than the original illustration projected.

Where to Find Your COI Numbers

Three documents tell you what you need to know.

The original policy contract contains a table of guaranteed maximum COI rates by age. These are the highest rates the insurer is legally allowed to charge. Current rates are almost always lower, but the maximums are the ceiling if the carrier ever raises charges, and comparing the two tells you how much room the company has to move.

The annual or quarterly statement breaks down every deduction from your cash value during the reporting period. The NAIC model regulation requires universal life statements to list debits by type, separately identifying mortality charges, expense charges, and rider costs, along with the current death benefit, cash surrender value, and any outstanding loans. If the projection shows the policy won’t stay in force through the next period under guaranteed assumptions, the insurer must include a lapse warning.¹

The most useful tool, and the one most policyholders never request, is an in-force illustration. You can ask your carrier or agent to run one at any time. Unlike the original illustration at purchase, an in-force illustration starts from current cash value, current COI rates, and current premium payments, then projects forward to show when the policy runs out of money under different scenarios. If you own a universal life policy and haven’t requested one in the last two years, that’s the first thing to do.

When COI Drains the Cash Value

If the cash value drops below the amount needed to cover the next monthly COI deduction, the insurer sends a notice and the policy enters a grace period. Most states require 30 to 61 days before the policy can terminate. During that window, a premium payment can restore the cash value and keep the coverage alive.

Miss the grace period and the policy lapses. Coverage ends and the death benefit disappears. Any remaining cash surrender value, net of surrender charges, gets paid out, though in COI-driven lapses that figure is usually close to zero. Surrender charges in the early years also reduce the net cash value available to cover COI, which makes a policy in its first decade especially vulnerable when premiums fall short.

Reinstatement after a lapse is sometimes possible but typically requires paying all missed COI charges plus interest, submitting evidence of continued insurability, and acting within a limited window, often two to five years depending on the policy terms. The older and less healthy you are, the harder reinstatement becomes.

The Tax Bill That Comes With a Lapse

A lapse isn’t just lost coverage. It can produce a surprise tax bill. When a life insurance policy is surrendered or lapses, any amount you receive above your cost basis is taxed as ordinary income.⁴ Your cost basis is generally total premiums paid minus any amounts you previously received tax-free, such as dividends or withdrawals.⁵

Outstanding policy loans make it worse. Loans aren’t taxed when taken because there’s an obligation to repay. When the policy lapses, that loan is effectively forgiven, and the forgiven amount is treated as income to the extent it exceeds your basis. This is often called phantom income because you owe tax on money you already spent years ago. A policyholder who borrowed $200,000 against a policy with a $50,000 cost basis could face tax on $150,000 of ordinary income at lapse while receiving nothing at termination.

A separate risk hits policies that fail the federal definition of a life insurance contract under IRC Section 7702, which requires every policy to pass either a cash value accumulation test or a guideline premium and corridor test. If high COI charges distort the relationship between death benefit and cash value enough to fail one of these tests, the IRS treats the income built up inside the policy across all prior years as ordinary income in the year of the failure.⁶ It’s rare and catastrophic, and it’s another reason to run in-force illustrations regularly.

What You Can Do About Rising COI

If charges are eating into your cash value faster than planned, you have real options. The right one depends on whether you still need the death benefit and how much you’re willing to pay to keep it.

Increase premium payments. Paying more rebuilds the cash value, which reduces the net amount at risk and slows the drain. An in-force illustration can tell you the exact figure needed to keep the policy funded to a target age.
Reduce the death benefit. Lowering the face amount directly shrinks the net amount at risk. Cutting a $1 million policy to $500,000 roughly halves the monthly charge. Check with the carrier about minimum face amount rules.
Switch from Option B to Option A. Moving from an increasing death benefit to a level one immediately shrinks the net amount at risk and the monthly deduction, and it’s often the single biggest lever available.³
1035 exchange into a new policy. Federal law lets you exchange a life insurance policy tax-free for another life insurance policy, an endowment contract, or an annuity. The replacement will be priced at your current age and health, so this only helps if you can qualify for favorable underwriting, and you’ll face new surrender charges on the new contract.⁷
Sell the policy in a life settlement. If you no longer need the death benefit and the policy is heading toward lapse, selling to a third-party buyer on the secondary market often yields significantly more than the cash surrender value. A secondary market valuation is worth getting before surrendering or walking away.

The one option that almost always ends badly is doing nothing. Policyholders who ignore rising COI until the grace period notice arrives have the fewest options and the worst outcomes.

Legal Limits on What Insurers Can Charge

Every universal life contract includes guaranteed maximum COI rates. The insurer can charge less but never more, and exceeding those caps is a breach of contract.

What’s more contested is which factors the insurer can use when setting rates below the guaranteed maximum. Policy language typically says rates are “based on” mortality factors like age, gender, and risk class. In Vogt v. State Farm Life Insurance Co., a class of more than 25,000 policyholders argued that State Farm had improperly folded taxes, profit targets, investment earnings, and capital requirements into COI calculations even though the contract listed only mortality-related factors. The Eighth Circuit held that the phrase “based on” was at minimum ambiguous and had to be read in the policyholders’ favor, affirming a $34 million jury verdict.⁸

The practical takeaway: read the COI provision in your contract. If it says charges are based on specific mortality factors and your rates are climbing faster than age alone would explain, the insurer may be including costs it isn’t entitled to include. The Vogt court also held that rising COI fees alone weren’t enough to put a policyholder on notice that something improper was happening, which means the statute of limitations may not start running just because the charges went up.⁸

1
National Association of Insurance Commissioners. Life Insurance Illustrations Model Regulation
2
National Association of Insurance Commissioners. Valuation Manual 2026 Edition
3
U.S. Securities and Exchange Commission. Intelligent Life VUL 2.0 Policy
4
Office of the Law Revision Counsel. 26 USC 72 – Annuities, Certain Proceeds of Endowment and Life Insurance Contracts
5
Internal Revenue Service. For Senior Taxpayers 1
6
Office of the Law Revision Counsel. 26 USC 7702 – Life Insurance Contract Defined
7
Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies
8
Justia Law. Vogt v State Farm Life Insurance Co, No 18-3419 (8th Cir 2020)