Final answer:
The premium for a children's rider is generally lower than the premium for the main policy. Actuarially fair premiums vary based on individual risk, and when set for a group without individual risk differentiation, must cover the average claims, company costs, and profits.
Correct option is 2. The premium for a children's rider is lower than the premium for the main policy.
Step-by-step explanation:
When adding a children's rider to a life insurance policy, it typically costs less than the main policy due to the lower risk associated with insuring children. The insurance premiums for riders are additional costs that are added to the main policy's premium and cover the additional risks that the riders insure.
Actuarially fair premiums are calculated based on the risk profile of the insured. If an insurance company had separate groups, one with a family history of cancer and one without, the premium for each group would be set according to their respective risk of claiming the insurance. The group with a history of cancer would have a higher actuarially fair premium due to a higher risk of dying, while the group without such a history would have a lower premium.
For the group as a whole, if the insurer does not differentiate based on cancer history, the premium would be averaged out across the entire group. This represents a scenario where the insurance company cannot price discriminate based on individual risk factors such as family history of cancer. In this case, the premium must cover the average claims, the costs of running the insurance company, and provide room for profit. If set too low, the insurance company could face losses, especially if the actual claims exceed the premiums collected.
The correct statement regarding the life insurance premium for a children's rider is that the premium for a children's rider is lower than the premium for the main policy.