Final answer:
A life annuity stops payments upon the annuitant's death with no further benefit, unlike cash-value (whole) life insurance, which includes a death benefit and cash account. Actuarial science helps determine fair premiums but charging a single premium to a diverse risk group could lead to adverse selection and financial risk for insurers.
Step-by-step explanation:
The annuity payout option that has no additional payouts regardless of when the annuitant dies is known as a life annuity. In a life annuity, the annuitant receives regular payments for as long as they live, but upon their death, the payments cease, with no residual value or benefit passed on to heirs. This contrasts with other options such as a cash-value (whole) life insurance policy which includes a death benefit in addition to accumulating a cash value that can be used by the policyholder.
Using actuarial science, companies can determine the premiums required for individuals based on risk factors such as health and family history. For example, if an insurance company identifies two different groups of men, those with a family history of cancer and those without and evaluates the associated risks, they can set premiums accordingly to ensure that the policy remains actuarially fair.
Charging a single actuarially fair premium to a mixed group disregarding individual risk factors can be financially risky for an insurance company. This is because the higher-risk individuals (such as those with a family history of cancer) would be more likely to buy the insurance, leading to a potential increase in claims and a possible financial loss for the company, a concept referred to as adverse selection.