Final answer:
Individual life insurance policies for each spouse offer flexibility in coverage amounts and can be tailored specifically. Actuarially fair premiums differ when calculated for high-risk groups vs. an entire pool without risk separation. A joint premium may lead to adverse selection, affecting the insurer's sustainability.
Step-by-step explanation:
The question pertains to the concept of life insurance policies and the implications of choosing individual life insurance policies for spouses as opposed to a joint life insurance policy. Cash-value (whole) life insurance policies offer not only a death benefit but also a cash value component that accumulates over time and can be used by the policyholder for various needs. The main difference is that purchasing individual policies for each spouse typically allows for more flexibility in coverage amounts, as each policy can be tailored to the specific insurance needs and financial situations of each spouse.
When addressing the actuarially fair premium for policies, the insurance premium varies based on risk factors, such as a family history of cancer. If an insurance company were to sell life insurance separately to each group, the premium would be calculated based on the specific group's risk profile. Conversely, if the company cannot differentiate between groups with or without a family history of cancer, the premium for the entire group would need to accommodate the increased risk, likely resulting in a higher premium for those without a family history of cancer.
If the insurance company charges the actuarially fair premium to the group as a whole without differentiating risk, there is a likelihood of adverse selection, where those with higher risks are more likely to purchase insurance, ultimately making it unsustainable for the insurance company. This highlights the importance of assessing individual risk factors when determining premiums for life insurance coverage.