Final answer:
The human life approach suggests that younger individuals need more life insurance than older people as they have more potential income to lose over their remaining working years. Insurance premiums based on actuarial fairness require payments that reflect the individual's risk group, thus affecting the coverage amount needed.
Step-by-step explanation:
The human life approach to life insurance valuation posits that younger people generally display larger insurance needs compared to older individuals. This is based on the potential economic loss that a person's premature death would signify. Younger individuals have many more potential working years ahead of them, thus their untimely demise would lead to a higher amount of lost earnings than that of older persons with fewer working years remaining.
When insurance premiums are set to reflect actuarial fairness, the amount each person pays aligns with their risk group. For example, as health care costs for women aged 18–44 are generally higher, they would be required to pay more for health insurance. Similarly, young male drivers are more accident-prone and thus might pay more for car insurance.
Applying this to life insurance, a younger person's policy would need to account for the higher potential monetary loss over time, thus resulting in generally larger life insurance requirements for them when compared to older people. If premiums are actuarially fair, the younger, at lower risk of dying soon, would pay less annually but would require a higher amount of coverage due to the greater number of income-generating years at risk.