Final answer:
Life insurance premiums are influenced by risk factors such as age and gender; higher risk equals higher premiums. Term insurance is often suggested for older or high-risk individuals, while whole life insurance is beneficial for younger individuals seeking long-term coverage. Accurate premium setting is crucial for insurance companies to balance risk and maintain profitability.
Step-by-step explanation:
Life insurance premiums are calculated based on various factors, including age and gender, which influence the risk profile of the insured. For someone based on age, consider a 50-year-old man with a family cancer history, he has a higher mortality risk and would be charged a higher premium. Term life insurance might be recommended for this individual as it is less expensive and may provide the necessary coverage for a specific period during which the risk is higher. Regarding gender, since young male drivers have historically more accidents than young females, a young man would be charged more for life insurance. Whole life insurance could be suggested for younger individuals as it offers lifelong coverage and a cash value component, albeit at higher premiums.
When life insurance is sold to individuals, the actuarially fair premium would be different for each group. For the group of men with a family history of cancer, the premium would be higher due to their elevated risk. In contrast, the premium for the group without a family history would be lower. If an insurance company were offering life insurance to the entire group without knowledge of family cancer history, the premium would be an average cost based on the overall risk, reflecting both higher and lower-risk individuals.
An insurance company must carefully consider how it sets premiums. If set too high, individuals in high-risk groups may opt not to purchase insurance at all, while if set too low, the company may not cover the cost of claims.