Final answer:
The cash value of a variable universal insurance policy is influenced by investment income, administrative costs, and the risk profiles of different insured groups. The policy's investment feature significantly affects cash value growth. Charging a uniform actuarially fair premium to all could threaten the insurance company's financial stability.
Step-by-step explanation:
The cash value of a variable universal insurance policy fundamentally depends on three key aspects. Firstly, it is affected by investment income earned on the reserves held by the insurance company. Secondly, it is influenced by administrative costs associated with running the insurance company. Lastly, the varying risk profiles of different groups of insured individuals also play a critical role in determining the cash value. A variable universal life insurance policy combines life coverage with an investment feature, so the performance of the investment options chosen by the policyholder greatly impacts the cash value accumulation.
If an insurance company were to charge an actuarially fair premium to the group as a whole rather than charging each risk group appropriately, it could lead to financial instability. The company could lose money if higher-risk individuals file more claims than expected, and these are not adequately balanced by the premiums collected from lower-risk groups.