Final answer:
The risk to the insurance company decreases as the cash value of a whole life insurance policy grows because the accumulated cash value funds a part of the death benefit, reducing the company's obligation at the time of claim.
Step-by-step explanation:
As the cash value of a whole life insurance policy grows, the risk to the insurance company decreases because a portion of the death benefit has already been funded through the accumulated cash value.
This means that the insurance company's obligation at the time of claim is reduced by the amount of the cash value. Furthermore, insurance companies earn income from premiums and investment income, often investing these funds in liquid investments that are easy to convert into cash.
These investments need to be readily accessible when the company needs to pay out insurance claims. Thus, as cash value increases and investments generate a rate of return, the insurance company's financial exposure decreases.
As the cash value of a whole life insurance policy grows, the risk to the insurance company also increases. This is because the insurance company becomes obligated to pay out a higher death benefit if the insured person passes away.
Additionally, the insurance company may need to increase the cash value reserves to cover the potential payouts, which can reduce their profitability.