How can life insurance be profitable if everyone dies?


I was going through life insurance policies and noticed that even if I lived to be 100+ the amount of money I would pay into a life insurance policy would still be lower than the insurance pay out. I imagine many people die much sooner and get paid out even more than what they contributed. How do life insurance companies still profit off these policies when everyone will eventually die and cash out? It’s not like car insurance where you can go without an accident.

In: Economics

Insurance companies take the money from the premiums and people pay in and use it to buy stocks and other investments. When the time comes to pay out to have made so much profit from the investments that they can afford to pay out even more than the premiums and still be making money. Warren Buffett is well known for doing this. He owns multiple insurance companies and uses the money from them to buy other stocks.

Warren Buffett’s own words:

Insurers receive premiums upfront and pay claims later. … This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. …

If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money — and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float. …

Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. I believe it likely that we will continue to underwrite profitably in most — though certainly not all — future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest.

Two ways

1. Buybacks: as explained when i got mine, if you become sick, as most people do before they die, you’ll likely incur medical expenses. So let’s say you’re dying of cancer the costs progressively.get more and more. Well the company will buy back the policy for a set amount. So your two million policy is now a quarter million in cash to help you and your family today, and the policy ends. Now you don’t have to take this money but it’s an option

2. Now this is speculative, but insurance companies pay a lot of money for people to do statical research on the police they offer. So they’re not gonna offer you a million dollar policy if it doesn’t make sense for them.

If you buy your policy at 30 and are likely to continue paying the premium until 65 well, they likely have made enough money to cover the policy, otherwise why would they issue it. It’s like gambling the house is gonna win because they know the math

Life insurance is only during the term of the policy. Most common terms are time. Time of when you work for a company, time when you maintain payments. If you die not during the term you don’t get a cash out, even though you paid initially

The majority of life insurance policies are *term*, which means they’re only good for a certain amount of time (10 years, 20 years, etc.). After that time the policy either lapses or the premiums go way up.

If you survive the entire term, then you paid the insurance carrier the entire term’s worth of premiums and got nothing back (except the peace of mind of being insured, which is the point).

Most people survive the term. And many others don’t keep paying over the life of the term, and the policy lapses…again, you paid the carrier money and they pay you nothing.

Most life insurance polices lapse before any benefit gets paid out. Even on policies that don’t lapse, some still don’t get paid out because no claim is ever made. It’s a somewhat shadier business model than property and casualty insurance where the policy holder is still alive to fight for their benefit.

There are a number of ways you can void your policy, whereupon everything you paid is lost and you collect nothing, E.G., you are a smoker and told them you are not; when you become sick or die, and they find out you smoked, even if you had quit for twenty years, it makes no difference and your policy would pay nothing.

Other have already given the main details, but remember not everyone buys life insurance, and some peoples policy’s expire before they die, and because they are much older (and be honest, closer to death) the premiums are much higher and for some unaffordable, so they do not renew.

Most life insurance is term, meaning it expires after a certain number of years. You’d typically buy a term policy that covers until your kids are grown or house paid off and need for income replacement drops dramatically. Since most people don’t die in, say the 30 years between 30 and 60 that the policy covers, insurance only pays out on a small percentage of policies. Whole life, which pays whenever you die, is much more costly. And in either case, the insurance companies invest the premium money paid into them, typically for decades, to grow money in addition to the premiums collected.

Life insurance is profitable because an actuary calculates how high a premium should be based off of MLC tables (the liklihood of someone dying at x age given that they are y years old now). There’s a famous example of an MLC table from some obscure German village a few centuries ago that was commonly copypasta’d in all my college textbooks when studying act sci.

This is used along with the determined payout to get an expected value for the policy. Premiums are set to ensure the insurance company makes a profit on most cases. Because insurance policies are written for lots of people, most policies will closely resemble the MLC table calculations, even if a few policies are unprofitable.

Time value of money also favors the insurance company. They get premiums now and can invest that money to pay off expenses later. This is called reserving iirc.

TLDR: Insurance companies use math to model how much they expect to pay you and when, and then make your premiums cover it.

Ask yourself “How can a casino be profitable if everyone wins?”

The answer is that “everyone” NEVER wins. The odds of such an occurrence is so low statistically as to be virtually impossible.

If that unicorn of an event were to actually come around, yes the host insurance company (or casino) would be screwed. Often **they** also have insurance on the books (through investment companies handling their huge reserves) and the odds that all the casinos with insurance have that double-layer statistically uncommon event at the same time is effectively zero.