Final answer:
The correct statement regarding term policy premiums is that the premium is level, meaning it does not vary over the term of the policy. Level term policies are designed with a fixed premium and decreasing term policies have a reducing benefit, not a reducing premium. Age and health are factors used to determine premiums, which are not consistent across all term policies.
Step-by-step explanation:
The true statement regarding the premium in term policies is that the premium is level, which means it does not change throughout the duration of the policy term. Decreasing term policies have a decreasing benefit amount, not a decreasing premium. It is also incorrect to say that premiums in term policies are not based on the insured's age; in fact, they are typically based on age, health, and life expectancy, among other factors. A level term policy specifically will have a level premium for the period of the term.
An insurance premium is the amount of money that an individual or business pays for an insurance policy. In an insurance system, one wouldn't expect each person to pay in benefits exactly what they pay in premiums because the risk is pooled, and the average benefits paid out are meant to equal the average premiums paid by all. An actuarially fair insurance policy is one where the premium equates to the expected payout, considering the probability and magnitude of a potential loss.
If an insurance company charges an actuarially fair premium to two separate groups with differing risks, the premiums would differ due to the varying probabilities of death. Offering a single actuarially fair premium to the entire group without discerning individual risks leads to adverse selection, where healthier people may opt out, leaving the insurer with a higher-risk pool than expected. This can result in financial loss for the insurance company.