Final answer:
Life insurance protects against financial loss from an individual's death, where policyholders pay premiums to receive potential dividends through options like the cash option. Dividends come from insurance companies' investment income and the actuarially fair premium determines the necessary premium to cover future claims.
Step-by-step explanation:
Life insurance is an insurance method for protecting an individual from potential financial loss upon death, where policyholders make regular premium payments to an insurance entity. In return, the insurance company may issue dividends to the policyholder, signifying a distribution of a portion of the company's profit. One option for receiving these dividends is through a cash option, which allows the policyholder to receive an annual, non-taxable dividend check. These dividends are derived partly from the insurance company's investment income. Insurance companies invest the reserves, which are the funds accumulated from premiums that have not been paid out as claims. These investments are typically in safe and liquid assets, which ensures that the insurance company can access these funds when needed. A good understanding of the actuarially fair premium which is the calculated amount needed to cover the expected value of future claims, is essential for maintaining the financial stability of an insurance company.