Final answer:
Whole life insurance policies are costlier than term policies because they include a cash value component and provide lifetime coverage. The premiums cover the death benefit, investment portion, and must align with risk assessments that are blended for an entire group if individual health histories are unknown.
Step-by-step explanation:
Whole life insurance policies are generally more expensive than other insurance options because they offer lifelong coverage and have an investment component known as the cash value. This accumulated cash value can serve as an account that policyholders can use during their lifetime. The premiums for whole life insurance are higher because they need to cover not only the death benefit but also fund the cash value, which grows tax-deferred over time. Policyholders might know more about their family's health history which could affect risk assessment but the actuarially fair premium must account for collective risks and costs.
For instance, if an insurance company could not distinguish between those with and without a family history of cancer, they would have to calculate a blended actuarially fair premium that spreads the risk across the entire group. This inevitably means that healthier individuals might end up subsidizing the higher risk individuals. This model is fundamentally based on the principle that the average person's payments into the insurance over time cover claims, administrative costs, and profits.