Final answer:
Insurance benefits can be understood through present and future value calculations, with the present discounted value formula as a key tool. Insurance premiums are payments for coverage, while deductibles are what the insured pays out-of-pocket before coverage. Moral hazard is a risk issue where costs are spread among all policyholders.The correct answer is option B
Step-by-step explanation:
When considering insurance benefits, understanding the present and future values is crucial for proper financial planning. The present value of benefits refers to the current worth of a future sum of money or stream of cash flows given a specific rate of return. Calculating this requires the present discounted value formula, which discounts the future value according to an interest rate to reflect the time value of money.
The future value of benefits is the amount of money an insurance benefit is worth at a specified time in the future, based on an assumed rate of growth or return. Insurance premiums are the payments made to an insurance company in exchange for coverage, while deductibles are the out-of-pocket amounts that the insured must pay before their insurance coverage pays out benefits.
An actuarially fair insurance policy is one in which the premium reflects the true risk of the insured event. The problem of moral hazard occurs when an individual has an incentive to take on risk because the cost is partially borne by others, as is the case with insurance where the cost of potential losses is spread among all policyholders.The correct answer is option B