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📋 '''Cost of insurance''' is the charge an [[Definition:Insurance carrier | insurer]] levies to compensate for the pure mortality or morbidity risk it assumes under a [[Definition:Life insurance | life insurance]] or [[Definition:Health insurance | health insurance]] contract. Distinct from administrative fees, investment components, or [[Definition:Policy fee | policy charges]], the cost of insurance isolates the price of the risk transfer itself — essentially what it costs, actuarially speaking, to promise a [[Definition:Death benefit | death benefit]] or other covered payout. In [[Definition:Universal life insurance | universal life]] and [[Definition:Variable life insurance | variable life]] products, the cost of insurance is explicitly deducted from the policy's [[Definition:Cash value | cash value]] each month, making it visible to [[Definition:Policyholder | policyholders]] in a way that traditional [[Definition:Whole life insurance | whole life]] premiums do not.

⚙️ Insurers calculate the cost of insurance using [[Definition:Mortality table | mortality tables]], the insured's age, gender, health classification, and the net amount at risk — the difference between the [[Definition:Face amount | face amount]] of the policy and its accumulated cash value. As the [[Definition:Policyholder | policyholder]] ages, the cost of insurance generally increases because the probability of a claim rises; however, if the cash value grows, the net amount at risk shrinks, partially offsetting that increase. [[Definition:Actuarial analysis | Actuaries]] set both guaranteed maximum rates disclosed in the contract and current rates that may be lower, giving the carrier flexibility to adjust charges within contractual bounds as experience data and [[Definition:Investment income | investment returns]] evolve.

💡 Grasping the cost of insurance is essential for anyone advising clients on cash-value life products, because it determines how quickly a policy's account may be depleted if [[Definition:Premium | premium]] payments stop or investment performance disappoints. A policy illustration may look attractive using current cost-of-insurance rates, yet the guaranteed rates could drain the cash value years earlier than projected — a dynamic that has driven [[Definition:Regulatory compliance | regulatory]] scrutiny and disclosure requirements around policy illustrations. For insurers, accurately pricing the cost of insurance protects [[Definition:Solvency | solvency]] and ensures that the [[Definition:Reserve | reserves]] backing these long-duration contracts remain adequate across shifting demographic and economic conditions.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Universal life insurance]]
* [[Definition:Mortality table]]
* [[Definition:Cash value]]
* [[Definition:Net amount at risk]]
* [[Definition:Death benefit]]
* [[Definition:Policy illustration]]
{{Div col end}}

Definition:Cost of insurance - Revision history

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