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Which of the following information will be stated in the consideration clause of a life insurance policy?

A The time period allowed for the payment of premium
B The conditions for insurability
C The amount of premium payment
D The parties to the contract

User Moriesta
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8.6k points

1 Answer

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Final answer:

The consideration clause of a life insurance policy typically states the amount of premium payment, which is what the insured pays to the insurance company in exchange for coverage. Different risk factors may affect premiums, and offering the same premium to a diverse risk group without specific information, such as family cancer history, increases the overall premium to manage unknown risks.

Step-by-step explanation:

The consideration clause of a life insurance policy typically states the amount of premium payment. The consideration is the value that each party to a contract agrees to exchange. In the context of life insurance, the consideration provided by the insured is the premium payment, and in return, the insurance company agrees to pay a death benefit to the beneficiaries listed in the policy upon the death of the insured, provided that all policy conditions are met. Insurance premiums are the cost that policyholders pay for coverage.

As for the actuarially fair premium, it is a premium that equals the expected payout for the policy. Different groups may have different premiums based on risk factors, such as a family history of cancer. If an insurance company charged the actuarially fair premium to each group separately, the premiums would reflect that group's specific risk.

However, if the company were to offer life insurance to the entire group without knowledge of family cancer histories, it would need to spread the risk across the whole group, possibly leading to a higher overall premium to account for the unknown risks, or it could experience financial difficulty if the set premium doesn't cover the actual cost of claims (the actuarially fair premium for the group as a whole would be higher as it averages the risk). Moral hazard refers to situations where having insurance changes a person's behavior, potentially leading to more insurance claims.

User Dereckson
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