Final answer:
A client with a variable life insurance policy that outperforms the assumed interest rate can expect an increase in their policy's benefits, as the account value grows more due to the higher return. This ties into the concept of compound interest and shows how excess returns could contribute to a company's profitability.
Step-by-step explanation:
If a client owns a scheduled premium variable life insurance policy with an assumed interest rate of 4%, and the separate account yields a net return of 8% for the year, the client could expect increased benefits due to the higher-than-assumed interest rate. Since the performance of the separate account exceeded the assumed rate, the account value will experience greater growth, potentially leading to higher cash values or death benefits, depending on the terms of the policy. This scenario illustrates the impact of investment performance in a variable life insurance policy where the cash value can fluctuate based on the returns of the underlying investment options.
This outcome shows the power of compound interest and the sensitivity of the accumulation value to different interest rates. It is quite similar to how an investor receives more than just interest payments in a bond investment. They also receive capital gains when the bond is sold for more than the purchase price, leading to a higher total return.
Ultimately, it exemplifies the fundamental law of insurance that the average person's premiums must cover claims, and company costs, and allow for profits, with investment performance possibly impacting the profitability.