Final answer:
Life insurance or life assurance is designed to provide a death benefit to beneficiaries while some policies also accumulate a cash value. Insurance companies use actuarial data to calculate premiums based on an individual's risk factors, such as family history of diseases like cancer.
Step-by-step explanation:
Understanding Life Assurance Premiums
Life assurance, commonly known as life insurance, plays a critical role in providing financial protection for a family after the policyholder's death. There are different types of life insurance policies, with cash-value or whole life insurance being one option. This type of policy not only provides a death benefit to beneficiaries but also accumulates a cash value over time, which the policyholder can use while still alive.
Insurance companies manage the premiums paid by policyholders efficiently. After a policy is paid out, the company may have surplus cash which can be lent to others. Policyholders can borrow against their policy's value, but this loan must be repaid with interest.
The concept of insurance is to protect against financial loss. By paying regular premiums to an insurance company, policyholders are entitled to compensation when a financial loss from an insured event occurs. However, this creates a moral hazard as people might be less vigilant against risks they are insured for. Additionally, insurance entities use the science of actuarial calculations to determine the fair premiums for different risk groups, such as individuals with a family history of cancer versus those without.
For example, considering a subset of 50-year-old men where 20% have a family history of cancer with a 1 in 50 chance of dying within the next year, and the remaining 80% have a 1 in 200 chance of dying, an insurance company selling policies would assess fair premiums differently based on these risk factors. The actuarially fair premium differs for each group and would also differ if assessed for the entire group without differentiating between the two risks.