Final answer:
The cost of employer-provided group life insurance over $50,000 is treated as taxable income to the employee. The actuarially fair premium for a group considers mortality rate and other risk factors. Charging one average premium for a group of varying health histories might lead to adverse selection and potential losses for an insurance company.
Step-by-step explanation:
The cost of employer-provided group life insurance with coverage amounts above $50,000 is treated as taxable income to the employee for tax purposes. This means that the amount of insurance coverage over $50,000 becomes a taxable fringe benefit, and the cost of the insurance determined by the IRS-issued Premium Table is included in the employee's income and is subject to income tax withholding and social security and Medicare taxes. Conversely, the premiums for coverage up to $50,000 are generally not included in the employee's taxable income, which is a tax advantage for employees.
To determine the actuarially fair premium for a group, actuaries must consider various factors including the mortality rate within the group. For example, 50-year-old men with a family history of cancer, who have a higher probability of dying within the next year than those without such a history, would have a higher actuarially fair premium due to the increased risk.
However, if the company tries to charge the same premium to both groups, it may lead to adverse selection, where those with higher risks are more likely to purchase insurance, potentially leading to financial losses for the insurance company.