Question

Give two examples of how life insurance premiums would be determined; one based on age and the other on gender. Explain which TYPE of life insurance you would recommend for each situation and WHY you think that is the best choice.

a) Example 1: Premium based on age - Recommend Whole Life Insurance for its stability.
b) Example 2: Premium based on gender - Recommend Term Life Insurance for flexibility.
c) Example 1: Premium based on age - Recommend Term Life Insurance for affordability.
d) Example 2: Premium based on gender - Recommend Whole Life Insurance for long-term investment.
Explain the difference between "annual premium" and "short-rate premium" and the exact calculation to determine the amount of the refund if a business or an individual cancels a policy.
a) Annual premium is paid for a full year, while short-rate premium is a penalty for canceling early.
b) The refund calculation involves subtracting the annual premium from the short-rate premium.
c) The refund calculation considers the time left in the policy term and the penalty for early cancellation.
d) Short-rate premium is higher, and the refund calculation is based on the number of months left in the policy.

Answer 1

Life insurance premiums are determined by factors including age and gender, with higher risks leading to higher premiums. Term life insurance is recommended for high-risk individuals, while whole life may suit healthy, young individuals seeking long-term coverage.

Step-by-step explanation:

Life insurance premiums can differ based on a variety of factors, including age and gender. For instance, premiums based on age might be higher for older individuals because they generally have a higher risk of passing away soon. For a 50-year-old man with a family history of cancer, an actuarially fair premium would take into account his increased risk of dying, which in our example is 1 in 50. On the other hand, 50-year-old men without such a family history have a mortality risk of 1 in 200.

When determining premiums based on gender, actuarially fair premiums would be different for men and women if data shows differences in risk factors or behavior. Since young male drivers tend to have more accidents than young female drivers, a car insurance company would likely charge young men higher premiums.

The choice of insurance type will often be tied to an individual's specific situation. Term life insurance could be advisable for the individual at a higher risk (such as the man with a family history of cancer) to provide coverage during a period where the risk is greatest, potentially until he becomes eligible for other benefits or until his dependents are no longer reliant on his income. For the younger individual who is healthy but seeking affordable premiums, a whole life policy could be suitable to provide coverage and a cash value component over the long term.

Annual premiums are the costs paid yearly for the insurance policy. A short-rate premium is an additional fee charged when a policy is cancelled before the term ends. To calculate the refund upon cancellation, insurers often use a table that indicates a percentage of the premium that will not be returned considering the remaining term of the policy. This often results in a smaller refund than if the premium was calculated on a pro-rata basis.