Final answer:
Allowing the cash value of a universal life insurance policy to drop to zero can result in policy lapse and loss of death benefits, potentially leading to higher premiums for the policyholder and financial instability for the insurance company.
Step-by-step explanation:
The danger of allowing a universal life insurance policy's cash value account to drop to zero is significant. If the cash value account depletes, the policy may lapse, resulting in loss of the death benefit. This cash value acts as a safety net for the premium payments, and without sufficient funds, the policyholder must either pay higher premiums or face policy termination. Moreover, premiums may increase if the insurance company has to cover the losses from other high-risk policyholders. This situation can lead to affordability issues for policyholders with lower risks, potentially discouraging them from maintaining their life insurance policies. The insurance company faces a parallel to banks with asset-liability mismatches, such as when a rise in interest rates forces a bank to pay higher interest to depositors than it collects from old loans at lower rates, threatening the bank's financial stability.