Final answer:
Upon the death of the first spouse, the surviving spouse will receive two-thirds of the joint and two thirds survivor immediate variable annuity. The actuarially fair premium for a life insurance policy varies based on the insured's risk, which can be estimated by factors such as family history of cancer. If an insurance company charges a single group rate, it risks financial instability due to attracting more high-risk policyholders.
Step-by-step explanation:
Understanding Life Insurance Premiums
When Mr. & Mrs. Williams purchased the joint and two thirds survivor immediate variable annuity, they chose a plan in which, upon the death of the first spouse, the surviving spouse will continue to receive two-thirds of the amount they were receiving when both were alive.
In the hypothetical scenario provided, we can calculate the actuarially fair premium for two separate groups of 50-year-old men based on their family history of cancer which affects their mortality risk. The insurance company has different expected payouts for each group, influencing the fair premiums for life insurance policies. The fair premium directly reflects the risk of the insured group.
For men with a family history of cancer, the actuarially fair premium would be calculated based on a 1 in 50 chance of dying in the next year, while for men without a family history, it would be based on a 1 in 200 chance. If the insurance company cannot differentiate between the two groups, the fair premium for the combined group would be a weighted average of the two individual premiums.
However, if the company charges this unified rate, it might attract more high-risk individuals, leading to potential financial losses.
Cash-value (whole) life insurance policies not only provide a death benefit but also include a savings component that accumulates cash value over time, which policyholders can use in various ways.