Final answer:
The major advantage of a single premium policy is that the total premium cost is typically lower because the lump sum is paid upfront. This single payment allows the insurer to invest the funds, potentially reducing the cost for the policyholder. It contrasts with policies requiring regular payments, where administrative and financing costs may increase the total premium paid over time.
Step-by-step explanation:
A major advantage of a single premium policy in insurance is that the total premium is lower as it is paid in one lump sum. This payment method means the insurer has immediate access to the funds, which can be invested to generate returns to support the payment of future claims. This efficiency often results in a lower cost for the policyholder compared to paying premiums over an extended period.
An illustration in the context of life insurance: Given a scenario involving 50-year-old men with and without a family history of cancer, actuarially fair premiums would be calculated differently for each group. For those with a family history, the premium would reflect the higher risk (1 chance in 50 of dying in the next year) compared to those without such history (1 chance in 200). If an insurance company sets a fair premium for the group as a whole, without accounting for the cancer history, there could be a distortion in risk assessment, leading to potential financial instability for the company due to adverse selection.