I haven’t done much research but from what I’ve read, the life insurance monthly payments are under $100 but will pay out huge numbers.
The example I found –
“Insurance Barometer Report said a $250,000 term life insurance policy for a healthy 30-year old would cost $500 a year or more.”
That’s like $25k total payments if they reach 80 years.
Am I missing something? How can companies afford this? Why isn’t absolutely everyone insured?
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Insurance is a pyramid scheme and a gamble. Everybody pays in and then the insurance company banks on few enough people getting payouts for claims that they come out ahead. Given your example a healthy 30 year old isn’t likely to cash in on their life insurance policy so their payments are just profit for the insurance company
Your example is *term* life insurance, which is the most common type of insurance policy issued. In term insurance, you pay a set premium over a *term period* of X years (10, 20, 30, etc), and then the policy either expires, is converted to permanent, or the guaranteed premium becomes a vastly inflated premium.
If your 30-year-old is truly healthy, then he is unlikely to die within the term. All the premiums he paid will be for naught (except of course the peace of mind of knowing his beneficiaries are covered, which is the point of insurance). The insurance company doesn’t have to pay him, and gets to keep all that premium to invest it, and occasionally pay out to the few unfortunate people who do pass away while being covered.
The part you are missing is the “term” in the title.
Term means the life insurance is only for a specific duration. If you are 30 and buy a 15 yr term policy you are gonna need to get a new policy when you turn 45. This allows insurance providers to supply cheap life insurance policies to people who’s age and health makes them an extremely low risk for dying due to a covered reason.
The older you get or the worse health you are in the more expensive and limited these types of policies become since you are a much higher risk of dying and making the company pay on the policy.
Remember: Insurance is about sharing risk for the insured. It’s a gamble (backed by statistics) for the company.
Compounding interest. They use the premiums to invest and reinvest in things such as stocks
People often stop paying their premiums and they surrender their equity.
If you put $50 a month in dividend stocks and reinvest the proceeds, you’d be a millionaire in a few decades.
A *term* life insurance policy is bought for a specific period of time. 20 years is a common amount. So if you buy a 20 term life insurance policy at 30 and you don’t die by age 50, it pays you nothing.
But let’s say you bought a 50 year term life insurance policy. Dying by 80 is far more common (77 the average).
If you look back about 50 years, what you’ll discover is that a dollar in the mid-70s was worth about a sixth what a dollar is worth today. So paying present-day money in exchange for future money is only worthwhile if you’re getting about six times the money returned.
Indeed, it’s not even that good. One common way to invest for your future is an index fund. Instead of picking specific stocks, you just have a company invest in a broad spectrum of securities linked to some common ‘index’ like the Dow Jones Industrial Average. In the mid-70s, the Dow Jones Industrial Average was around $800. In the modern day, it’s over $32,000 – about 40 times as much. Given that your insurance company is a much savvier investor than you are, merely performing as well as the Dow-Jones Industrial average means that it’s going to gain a huge advantage holding onto your money for that long a time.
Now, it’s not quite as good as I’m making out because you’re making payments across the entire time period rather than just upfront but the average across all the payments is still an enormous multiple.
Lastly, some people will simply stop paying their term life premiums. Once they stop paying, the term life policy ends and the insurance company just gets to keep all the money paid in without ever having to pay out.
That being said, life insurance in the modern day is normally a terrible investment. In the past, it made some sense for working family men to purchase it to insure against the catastrophe of leaving your family without a breadwinner. In the modern day, you’re better off just investing in securities and relying on the fact that your wife can work and potentially re-marry.
The companies average out their risks over a lot of users, with the cost of the policy changing based on that risk.
The nation’s can be fairly tight when they are averaged over so many people, but the overriding fact is that they pay out slightly less on average than they charge.
If you are a fit thirty year old, it sounds like a great deal – you are paying in a relatively small amount for a large payout because the chance of death is realistically pretty low. Enough thirty year olds will pay their insurance and not die to cover the cost of the small percentage that do.
If you have health problems, you are more likely to die and this is taken into account by an increase in the monthly cost.
Similarly, as you age, your policy will be periodically re-evaluated. As you get older the costs will rise in line with the risk.
Keep your policy long enough and your will eventually end up turning positive for the insurance company – you will have paid in more than you will get back should you die. The problem is that if you cancel your policy you get back nothing at all, do most people keep them running anyway.
It is all just a big gamble – by taking out a policy you are assuming you will die before you reach the same amount of money by just putting the cost of a policy into a savings account every month. The insurance company are gambling that you will live longer.
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