Final answer:
Modified whole life insurance policies have higher premiums initially followed by lower premiums, unlike traditional whole life policies with level premiums. Insurers must balance premiums collected with death benefits paid out, operating costs, and profits. Regulatory attempts to enforce low premiums can cause insurers to exit markets or refuse high-risk individuals.
Step-by-step explanation:
The premium for a Modified whole life policy is structured differently compared to a typical whole life insurance policy. In a Modified whole life policy, premiums are typically higher in the initial years and then become lower for the remainder of the policy term. This is contrary to most traditional whole life policies, where premiums are level throughout the life of the policy. The initial higher premium in a Modified policy may be used to fund the cash-value aspect of the policy more quickly.
When analyzing life insurance, actuaries consider the risk profile of the insured. For example, if you divide a group of 50-year-old men based on family history of cancer, the actuarially fair premium would be higher for those with a history of cancer compared to those without. A life insurance provider must maintain a balance so that the average amount paid in premiums supports the death benefits, administrative costs, and the profit margin.
State insurance regulators sometimes set low premium rates to protect consumers, but insurance companies may respond by avoiding high-risk individuals or pulling out of markets where they cannot operate profitably. For instance, when New Jersey attempted to impose low auto insurance premiums, multiple companies ceased offering services in the state. This illustrates the critical balancing act insurers face in setting premiums to cover various risks while remaining competitive and profitable.