Final answer:
Coinsurance typically involves the insurance policyholder paying a part of a loss, and the insurance company paying the remainder. In the context of a life insurance policy, reaching coinsurance means that policy contributions and earnings only cover mortality and expense charges, without adding to the cash value.
Step-by-step explanation:
If the interest earnings in a policy and the policyowner's contribution cover only the amount of the mortality and expense charges for that policy year, the policy has reached what is called the point of coinsurance. This term is typically associated with health insurance and involves the policyholder paying a percentage of a loss, while the insurance company pays the remaining cost. However, in the context of a life insurance policy, particularly cash-value or whole life policies, this would mean that the policy's investment gains plus the owner's premiums are just sufficient to cover the policy's costs, such as mortality and expense charges, without accumulating any additional cash value.
These costs include the risk of the policyholder dying (mortality charges) and the operational costs of the insurance company (expense charges). It is important for policyowners to understand that their premiums and the interest earnings need to cover these costs while ideally also providing room for the policy to accumulate cash value over time. Cash-value life insurance policies are designed to provide a death benefit and also build up savings that can be drawn upon if needed.
Insurance functions on the fundamental principle that the average person's payments into an insurance policy over time must cover their claims, the cost of running the insurance company, and leave room for profits. When a policy's contributions and earnings only meet the cost of claims and expenses, there is no extra to contribute to cash value or profits, indicating a break-even point for that year.