Final answer:
The cost of a disability income policy is determined by factors such as age, health, and occupation, but not by the insurance company's investment income, administrative costs, or adjustments for different risk groups.
Step-by-step explanation:
The cost of disability income policy coverage is based on several factors, but there are certain elements that do not play a role in determining the cost of coverage. Factors that typically impact the cost include the policyholder's age, occupation, health status including pre-existing conditions, the waiting period before benefits begin, the length of benefit payments, and the amount of monthly benefits.
However, attributes such as investment income earned on reserves, administrative costs, and adjustments for different risk groups are factors that insurance companies consider overall when determining premiums for their entire pool of insured individuals but do not directly affect the cost of coverage for an individual policy.
An important aspect of insurance coverage is actuarial fairness, which suggests that premiums should be set so that they accurately reflect the risk group to which a policyholder belongs.
This notion would have higher risk individuals pay more for insurance due to their increased likelihood of filing a claim. As per the information given, aspects like healthy or unhealthy lifestyles, areas with high theft or robbery, and demographic data about accidents and healthcare spending impact risk assessment and, subsequently, insurance premiums.
Therefore, when determining the cost of a disability income policy, insurance companies use actuarial science to assess individual risk, rather than basing premiums on how much they must cover the aggregate of all claims, run the company, and generate profit.