Final answer:
The premium for a Modified whole life policy starts lower than that of a typical whole life policy, then increases later. Insurance premiums are based on risk factors and must cover claims, costs, and profits. Regulatory attempts to lower premiums can result in insurance companies restricting coverage or exiting markets.
Step-by-step explanation:
The premium for a Modified whole life policy is typically lower than the typical whole life policy during the first few years and then higher than typical for the remainder of the policy. This type of policy is designed to make life insurance more affordable in the early years, with the understanding that the premium will increase later on. Life insurance, including cash-value (whole) life insurance, provides a death benefit and also accumulates a cash value that can serve as an account for the policyholder's use.
When determining premiums, life insurance companies consider the risk factors of individuals. For example, using a group of 50-year-old men, differentiating those with a family history of cancer from those without can show the impact of risk factors on insurance premiums. Actuarily fair premiums would reflect the probability of claim events such as death.
However, insurance companies must also consider investment income earned on reserves, administrative costs, and profit margins. If state insurance regulators pass rules to set low premiums, it could result in insurance companies avoiding high-risk or medium-risk individuals or even withdrawing from the market, as seen in New Jersey and Florida in past years.