Final answer:
The Cost of Insurance in a Universal Life Policy increases with the policyholder's age and risk, to cover the growing chance of claims and administrative costs, and to ensure profit margins. Risk groups also influence COI since individuals with higher predicted risks necessitate higher contributions.
Step-by-step explanation:
The Cost of Insurance (COI) component of a Universal Life Policy tends to increase every year due to the fundamental law of insurance, which dictates that the average person's payments into insurance over time must cover the average person's claims, the costs of running the company, and also leave room for the company's profits.
As a person ages, their likelihood of having a claim due to morbidity or mortality increases, thus leading to higher insurance costs. In addition, companies must account for administrative costs and investments that may not yield sufficient returns to offset these expenses without raising the COI.
Furthermore, risk groups play a pivotal role in determining insurance rates. People may have different risk profiles based on genetics, personal habits, or even their geographical location.
Those with higher risks will contribute to a rising average cost of claims, necessitating an increase in COI to maintain actuarial fairness and ensure that the insurance pool is adequately funded.
Consequently, the COI is not static and is reassessed to reflect changing risk factors and to maintain financial balance within the insurance company.
It's significant to note that state insurance regulators' attempts to set low premiums can affect market dynamics. If regulators set premiums too low, it may lead insurance companies to avoid covering high-risk groups or withdraw from a market altogether, as observed in New Jersey and Florida. Such regulations can inadvertently lead to increased costs for consumers, including potential increases in the COI for those who manage to obtain insurance coverage.