Final answer:
An Endowment policy is a life insurance product that provides a lump sum either upon the insured's death or at the end of a specified period, whichever comes first. It combines the aspects of savings with the benefit of life protection. In contrast, whole life insurance has a cash value and provides lifelong coverage.
Step-by-step explanation:
The type of life insurance product that pays a lump sum upon the earlier of the insured's death or at the completion of a specified period is known as an Endowment policy. This type of policy serves as both a savings vehicle and life insurance protection. If the insured person is still alive at the end of the specified period, the policy matures and the insured receives a lump sum. Should the insured die before the end of the term, the death benefit is paid out to their beneficiaries.
Cash-value (whole) life insurance is another type of life insurance, which has both a death benefit component and a cash value portion that grows over time and can be used by the policyholder while they are alive. In contrast to endowment policies, whole life insurance does not have a maturity date and is designed to provide coverage for the insured's entire lifetime.
To answer an example based on life insurance premiums, consider a scenario with two groups of men classified by their family history of cancer. Here's how the premiums would be calculated for each group and for the entire group if the details on family cancer history are unknown:
- For the group with a family history of cancer (20% of 1,000 men with a 1 in 50 chance of dying), the premium would be higher than for those without.
- For the group without a family history of cancer (80% of 1,000 men with a 1 in 200 chance of dying), the premium would be lower.
- If the insurance company could not differentiate between the two groups, they would have to average out the premiums, which might lead to adverse selection.