Final answer:
The policy that will pay the face amount plus a sum equal to all or a portion of the premiums paid upon the insured's death is the Return-of-premium policy. Unlike cash-value life insurance, this type of policy explicitly refunds premiums paid if the insured outlives the term. Proper pricing of premiums is crucial for insurers to avoid adverse selection and ensure financial stability.
Step-by-step explanation:
Upon the insured's death, the policy that will pay the face amount of the policy plus a sum equal to all or a portion of the premiums paid is a Return-of-premium policy. This type of policy is essentially a term life insurance policy with a return of premium feature where the premiums paid over the term are returned to the beneficiary or the policyholder if they are still alive at the end of the policy term.
Cash-value life insurance, such as whole life insurance, combines a death benefit with a cash value component. This cash value accumulates over time and can be used by the policyholder for various needs. However, it's important to distinguish between the cash value aspect and the return of premium feature.
When considering actuarially fair premiums for insurance, insurance companies estimate the likelihood of an insured event occurring and charges premiums accordingly. If the company doesn't differentiate risk properly, such as in the case where it cannot distinguish between individuals based on their family history of cancer, it could lead to adverse selection where higher-risk individuals are more likely to buy the insurance, potentially resulting in financial losses for the insurer.