With respect to an insurance contract, it is a measure of cost that constitutes deferred sales costs (acquisition costs) that arise from acquiring a new business (insurance contracts/ policies) over the term of the contract. It is an accounting method whereby an insurance firm defers the contract’s sales costs over the term of the insurance contract.

Deferred acquisition costs (DAC) are principally direct sales commissions and other distribution and underwriting costs that are deferred on the sale of insurance products, to be recovered from future profits/ premiums. Acquisition costs that may be deferred are incremental direct costs of contract acquisition, other direct costs of contract acquisition, other costs directly attributable to acquisition business, and direct-response marketing costs.

Direct sales commissions and other costs deferred as DAC are capitalized and amortized over time. For specific products (e.g., universal life contracts), DAC are amortized using projections of estimated gross profits over amortization periods equal to the approximate term of the respective business. For other insurance products, DAC are generally amortized as a percentage of premiums over amortization periods equal to the premium-paying period.