Final answer:
A joint life insurance policy, particularly a first-to-die policy, pays death benefits after the first person covered by the policy dies. These policies are suitable for ensuring the financial stability of the surviving person. Actuarial fairness in premiums is essential to avoid adverse selection and financial losses for insurers.
Step-by-step explanation:
Type of Life Insurance Policy
The type of policy that would pay the death benefits after the first person dies, when the policy covers two or more lives, is known as a joint life insurance policy, specifically a first-to-die or joint first-to-die life insurance policy. This is in contrast to a survivorship policy, or second-to-die policy, which pays out only after the second person passes away. Joint life insurance policies are beneficial for partners who want to ensure that the surviving member has financial support after the first person's death.
Life Insurance Example
For instance, in a scenario involving a group of 50-year-old men, some with a family history of cancer and others without, the actuarially fair premium would be calculated differently for each group if life insurance was sold separately. For those with a family history of cancer and a higher chance of dying within the next year, the premium would be higher compared to those without such a history. However, if the insurance company provided a single premium for everyone without considering family cancer histories, it might result in adverse selection due to higher-risk individuals being more likely to purchase the insurance, potentially causing financial losses for the insurer.