Final answer:
An element of a variable life policy includes a cash value account, which is an investment component that can grow over time. The death benefit may vary based on the performance of the invested funds, and policyholders might be able to adjust premiums and benefits. Insurance companies use actuarially determined premiums to ensure all expenses and profits are covered.
Step-by-step explanation:
An element of a variable life policy includes a cash value account that can accumulate value over time. This cash value acts as an investment account, where part of the premiums paid by the policyholder are invested to potentially grow the cash value of the policy. The death benefit in a variable life policy is tied to the performance of the investment options, which means it can fluctuate depending on the underlying investment returns. This is unlike traditional whole life insurance policies, where the death benefit is typically a guaranteed amount. Furthermore, policyholders may have the flexibility to adjust the premiums and death benefits over the course of the policy, subject to certain constraints and provisions set by the insurance company.
A fundamental law of insurance is that payments from policyholders over time must cover the cost of claims, the administrative expenses of running the insurance company, and allow for company profits. This applies to variable life policies and all other forms of life insurance. Also, when setting premiums, insurance companies assess risk factors such as age or health history. In an example scenario where an insurance company sells a policy to a group with varied risk of cancer history, the actuarially fair premium would be different when calculated for each subgroup compared to when the entire group is treated as a single pool.