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
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.
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