Final answer:
The limit of liability for a life insurance policy is the policy's face amount. Actuarially fair premiums reflect individual or group risk, and setting a single premium for a diverse group may lead to adverse selection. Life insurance companies manage large cash reserves from policy payouts, often reinvesting or offering loans.
Step-by-step explanation:
The limit of liability for a life insurance policy is typically the policy's face amount, which is the sum that the insurance company agrees to pay upon the insured's death. This amount is determined by the contract between the insurer and the insured and is not directly affected by the Department of Insurance, total premiums paid, or insurance company's re-insurer.
Concerning the setting of premiums:
- If the insurance company were selling life insurance separately to each group, the actuarially fair premium would be set based on the specific risk factors and expected claims of that group.
- If the insurance company were offering life insurance to the entire group without knowledge of family cancer histories, the actuarially fair premium would be a weighted average reflecting the blended risk profile of the entire group.
The concept of actuarially fair premium refers to a premium that equally matches the present value of expected future claims, considering the costs of running the company and allowing for a margin of profit. If the company sets one premium for the group as a whole without segmenting the groups by risk, they may face adverse selection where higher-risk individuals are more likely to buy insurance, potentially leading to losses for the company.
Life insurance companies also need to manage funds responsibly as they often handle large amounts of cash after paying out policies. This cash can be reinvested or used to offer loans to policyholders, with the expectation of repayment and interest.