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?
In: 6
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.
Latest Answers