Final answer:
A single pay whole life contract offers lifetime coverage with a death benefit and cash value. Actuarial fairness in premiums for life insurance is based on the risk of death, which varies with factors like family history. The Social Security program provides retirement benefits starting at age 65, increasing to 67.
Step-by-step explanation:
A single pay whole life contract provides coverage until death or age 100 or 121, depending on the terms set by the insurance company. This policy is designed to last for the insured's entire lifetime, offering both a death benefit and a cash value component which accumulates over time and can be used by the policyholder.
Actuarial fairness involves setting a premium that is proportionate to the risk. For our example:
- For the group with a family history of cancer (20% of 1,000 men), the chance of death is 1 in 50. The actuarially fair premium would be calculated by the expected payout ($100,000) multiplied by the probability of occurrence (1/50), resulting in a premium of $2,000 per person.
- For the group without a family history of cancer (80% of 1,000 men), the probability is lower at 1 in 200. The actuarially fair premium would be $100,000 multiplied by 1/200, equaling $500 per person.
- If the insurance company could not differentiate between the groups, it would need to calculate a weighted average premium for the entire group. This average would be higher than the fair premium for the low-risk group, but lower than the high-risk group's premium.
- If the insurance company tries to charge an average premium to everyone in the group, adverse selection may occur, as healthier individuals may opt-out, leaving a disproportionate number of high-risk individuals insured, potentially leading to losses for the insurer.
The Social Security program provides some level of social insurance or financial protection for workers when they