Question

An individual life insurance policy will become incontestable no later than how long after its effective date?

a) 1 year
b) 2 years
c) 3 years
d) 5 years

Answer 1

An individual life insurance policy becomes incontestable no later than 2 years after its effective date. The actuarially fair premium for those with a family history of cancer is $2,000, while it is $500 for those without. Charging one premium for a mixed group may lead to adverse selection.

Step-by-step explanation:

An individual life insurance policy will become incontestable no later than 2 years after its effective date. This rule helps to protect both the insurer and the insured by ensuring a period within which the insurance company has the right to contest or deny a claim typically due to misrepresentations or fraud. Once the incontestability period, usually two years, has passed, the insurer can no longer contest the claim except under specific circumstances such as non-payment of premiums.

To answer the related actuarial questions:

1. For those with a family history of cancer (20% of 1,000 men), the actuarially fair premium is the expected loss per person, which would be (1/50) * $100,000 = $2,000.
2. For those without a family history of cancer (80% of 1,000 men), the premium would be (1/200) * $100,000 = $500.
3. If the insurance company charges the actuarially fair premium to the entire group without distinguishing between the two groups, the healthy group may be overcharged, leading to adverse selection where healthier individuals opt-out, leaving a riskier pool.