Final answer:
The full face amount of a whole life policy is received when the policyholder dies. Charging an actuarially fair premium for a whole group, without considering individual risk factors, can lead to adverse selection and potential financial strain for the insurance company.
Step-by-step explanation:
Understanding Life Insurance Policies
When referring to the full face amount of a whole life policy, the insured will be able to receive this benefit when the policyholder dies. The death benefit is the guaranteed sum that the beneficiaries are entitled to and does not decline over time. In contrast, the cash value is an accumulated amount that can serve as an account the policyholder can use for borrowing or cashing out during their lifetime. It's important to note that loans against the policy can reduce the death benefit.
The question presented involves understanding which circumstances allow for the full face amount to be paid. In a scenario where an insurance company is dealing with two groups with different risk factors, charging each group the actuarially fair premium is based on their specific risk of mortality. However, if an insurance company charges the aggregate group one uniform premium, without accounting for individual risk factors, it may lead to adverse selection, where higher risk individuals are more likely to purchase the insurance, thereby potentially leading to losses for the company.
The company needs to carefully balance the premiums to reflect the mortality risk of both groups to maintain financial stability and fairness. If the actuarially fair premium for the whole group does not consider the higher mortality risk of the group with a family history of cancer, the insurance company may face financial strain due to an unexpectedly high number of claims.