Final answer:
The Modified Whole life policy would likely have the lowest first-year premiums compared to Whole life, Universal life, and Single Pay life insurance. Actuarially fair premiums for life insurance would vary for groups based on the probability of death and the amount of payout. Without knowledge of cancer history, an insurer would need to calculate a fair premium for the group as a whole, potentially leading to adverse selection. A. Whole life
Step-by-step explanation:
Understanding Life Insurance Premiums
When considering the first-year premiums for different types of life insurance policies, it's essential to understand the distinct characteristics of each. Whole life insurance offers coverage for the insured's entire lifetime with fixed premiums and a cash value component. Universal life is similar but offers more flexibility in terms of premiums and death benefits. A Single Pay life insurance policy is where the entire premium is paid upfront in one lump sum, making it quite high initially. Lastly, Modified Whole life insurance usually starts with lower premiums that increase over time after the initial period.
In the first year, the Modified Whole life policy would typically have the lowest first-year premiums compared to Whole life, Universal life, and Single Pay life insurance policies. This is because Modified Whole life policies are designed with a lower premium in the initial years, followed by higher premiums later on. The low upfront cost is particularly appealing to individuals who expect to have a higher income in the future or are currently limited in their ability to pay higher insurance premiums.
It is also crucial to comprehend the concept of actuarially fair premiums. These are premiums that, on average, are equivalent to the present value of the expected benefit payouts by the insurance company. If we examine the example given, where 50-year-old men are divided into two groups based on family cancer history, calculating the fair premium for each would require considering the probability of death and the amount of payout.
To calculate the actuarially fair premium for each group separately, we consider the expected payout per person in the group, which is the probability of death times the benefit amount. For the group with a family history of cancer (20% of the men), the probability is 1 in 50, or 2%; for the group without family history (80% of the men), the probability is 1 in 200, or 0.5%. The insurance company could use these probabilities to calculate a fair premium for each group.
If the insurance company were to offer life insurance to the entire group without knowledge of family cancer history, they would have to consider the overall risk of death based on combined probabilities. Charging an actuarially fair premium for the group as a whole could potentially lead to adverse selection, where those with higher risk are more likely to purchase insurance, potentially resulting in losses for the company.