Final answer:
The insurance described is whole-life insurance. It requires payment of a specific premium each year until death and can develop cash value. The calculation of premiums for life insurance can vary based on individual risk factors like family history of cancer.
Step-by-step explanation:
The type of insurance described in the student's question is whole-life insurance. With this kind of insurance, the insured agrees to pay a specific premium each year until death. This insurance is distinctive because it provides both a death benefit and can accumulate a cash value over time, which can be used by the policyholder for different financial needs.
As for the example provided about the 50-year-old men and the calculation of premiums based on cancer history, the insurance company would have to calculate separate actuarially fair premiums for each group. For the group with a family history of cancer (20% of 1,000 men), there is a higher risk resulting in a higher premium. Conversely, the remaining men have a lower risk of death within the next year, thus their premium would be lower.
If the insurance company sets one premium for the entire group without considering the cancer history, those with a higher risk (family history of cancer) may be paying less than their fair share while those with a lower risk may be paying more. This creates a situation of moral hazard where individuals may not be as incentivized to prevent the insurable event since they are not paying premiums that accurately reflect their risk.