Final answer:
The true statement about group term life insurance is that it is usually written in the form of yearly renewable term insurance. The actuarially fair premium for a hypothetical group of 50-year-old men would be different for those with and without a family history of cancer. If the insurance company charges one premium for all, it might face adverse selection, risking financial stability. Option C is correct answer.
Step-by-step explanation:
Regarding the statement about group term life insurance, the true statement is that group term insurance is usually written in the form of yearly renewable term insurance. This is because it allows for flexibility and cost-effectiveness for the employer providing the insurance, and it is a common format for group term policies.
Considering the given scenario of 50-year-old men divided into two groups based on family cancer history, we can determine the actuarially fair premium for each group and for the whole. For the group with a family history of cancer, with a 1 in 50 chance of dying in the next year, the fair premium would be calculated by multiplying the probability of death (1/50) by the payout amount ($100,000), which is $2,000. For the group without a family history of cancer, with a 1 in 200 chance of dying, the fair premium is calculated similarly and results in a $500 premium. If the insurer could not differentiate between the groups and charged one premium to the entire group, they would need to weigh the combined risk and come up with a single premium that averages out the risk.
However, if the insurance company tries to charge the combined actuarially fair premium to the entire group instead of to each group based on their specific risk, adverse selection could occur. Healthier individuals, or those with lower risk, might opt out, leaving the insurance pool with a higher average risk, leading to potential losses for the company or a need to raise premiums, which could exacerbate the problem.