Final answer:
Whole life insurance is generally more expensive compared to variable life insurance primarily due to its cash value component, which serves as an investment that grows over time. Whole life insurance provides lifelong coverage and guarantees cash value growth, factors that lead to higher premiums. These premiums must cover the cost of claims, administrative costs, and ensure profit for the insurance company.
Step-by-step explanation:
When comparing whole life insurance and variable life insurance, whole life insurance is generally more expensive. One of the main reasons for this cost difference is the cash value component of whole life policies. Unlike variable or term life insurance, which merely provide a death benefit, whole life insurance includes an investment component. This means that a portion of the premiums paid into a whole life policy accumulate over time, creating a cash value that the policyholder can borrow against or use for other purposes.
This cash value grows at a guaranteed rate and can add significant investment income to the insurance company's reserves, which is factored into the cost of the insurance. Additionally, whole life insurance provides coverage for the insured's entire life, as opposed to variable life insurance, which may be tied to investment performance and market conditions and does not guarantee cash value accumulation.
Considering the costs associated with insurance, such as administrative costs and investment income, the average premiums must be sufficient to cover claims, operational expenses, and profits for the insurance company. Also, customers often have more information about their own risk factors, like family health history, than the insurer. This information asymmetry can lead to higher costs for the insurer, which in return, causes premiums to rise.