Final answer:
Yes, the first $100,000 of group term life insurance premiums are excludable from gross income; the question's main issue is an actuarially fair premium and how it impacts insurance company finances when applied to a group without considering individual risks.
Step-by-step explanation:
True, the premiums on the first $100,000 of group term life insurance protection are excludable from the employee's gross income under the IRS guidelines. This is often referred to as a tax exclusion and is an important aspect of employee benefits. Group term life insurance is a type of life insurance where the risk is spread across a group, typically offered by an employer.
The question regarding the actuarially fair premium concerns the scenario in which an insurance company charges a single premium to a whole group rather than charging each subgroup (those with a family history of cancer and those without) separately. If the insurance company opts to charge everyone in the group the same premium without accounting for the variations in risk, it could lead to unfair pricing and potential financial losses for the insurer. This is because the insurer would be undercharging the higher risk individuals and overcharging the lower risk individuals.
Should the insurance company charge an actuarially fair premium to the entire group without differentiating between the varying risks, they risk attracting a disproportionately high number of high-risk individuals, while low-risk individuals may choose not to participate or might seek more competitive rates elsewhere. This scenario could lead to a financial imbalance and potential solvency issues for the insurance company due to the miscalculation of premiums based on the actual risk assessment.