Final answer:
The net premium for a variable life insurance policy covers insurance claims, administrative costs, and contributes to the firm's profits. Investment income can influence net premiums. Charging an actuarially fair premium to the entire group without accounting for individual risks could result in financial instability for the insurance company.
Step-by-step explanation:
The student's question pertains to the net premium paid by the owner of a scheduled premium variable life insurance policy. In life insurance, the net premium is calculated to cover the costs of insurance claims, administrative expenses, and to contribute to the profits of the insurance firm. When considering variable life insurance, the net premium must take into account the investment component as the policy includes a cash value investment that is subject to market fluctuations. Investment income earned on reserves can help offset some of these costs, potentially leading to lower net premiums.
If an insurance company charges an actuarially fair premium to the entire group rather than to each subgroup based on their individual risks, it could result in inadequate premium collection. This would mean that higher risk individuals would pay less than needed to cover their expected claims, while lower risk individuals would pay more than their expected claims. Over time, this could lead to financial instability for the insurance company because they might not collect enough premiums to cover all claims and expenses, undermining profitability.