Final answer:
The Conversion privilege in a group Term Life policy allows an individual to continue their insurance without evidence of insurability after leaving the group. Calculating actuarially fair premiums requires separate assessments for groups with different risk profiles, and charging an averaged premium can lead to adverse selection, affecting the insurer's financial stability.
Step-by-step explanation:
The feature of a group Term Life policy that enables an individual to leave the group and continue their insurance without providing evidence of insurability is known as the Conversion privilege.
This privilege allows policyholders to convert their group term life insurance into an individual policy, typically without a medical exam or any health questions. The privilege is designed to provide continuous coverage despite changes in employment or group membership status.
Let's use an example to illustrate the calculation of an actuarially fair premium:
- For the group with a family history of cancer (20% of 1,000 men), the chance of dying in the next year is 1 in 50. Therefore, the expected cost per person is (1/50) * $100,000 = $2,000.
- For the group without a family history of cancer (80% of 1,000 men), the chance of dying is 1 in 200. Hence, the expected cost per person is (1/200) * $100,000 = $500.
If the insurance company cannot differentiate between the groups due to lack of information on family cancer histories, they would have to calculate an average premium for the entire group. This would involve weighting the risks of both groups and determining a single premium that reflects the average risk.
Should the insurance company charge this averaged premium to everyone, those without a family history of cancer may be overpaying for their risk level, while those with a family history are underpaying.
Over time, this could lead to adverse selection, where healthier individuals choose not to purchase insurance, leaving a pool of higher-risk individuals. This scenario could potentially threaten the financial stability of the insurance company.