how does life insurance make sense, like how does $40/month for 10 years get you 500,000 life insurance?


I’m probably just stupid 😭

In: 4901

Most people will never use it, and they look at your medical history to determine how much the cost will be, so for some people it will be more expensive than $40.

The insurance company is betting you’ll still be alive in ten years, and the “*Term Life Insurance*” policy will expire worthless.

They keep your $4,800 and you stay alive. You can renew the policy, but now you’re ten years older and it will cost a lot more.

If you were 75 years old they’d refuse to renew it again – you all know the odds now.

You can get “Whole Life” plans that don’t expire, but they’re much more expensive and function more like an investment account.

You’re unlikely to die within those 10 years, so the insurance company is betting that they will collect payments from you but pay out nothing.

Then they have a million other clients that they’re pricing similar plans for. Since they have *extensive* statistics on the chance of people dying, they’re likely to only end up paying out a few of those policies.

The vast majority of life insurance is TERM life insurance, which covers for a specific period of time.

Typically, one gets term coverage for a period of time like until kids would be adults or house is paid off.

So some 30 year old who just bought a house and had a kid might get a 30 year term policy, which then covers them from age 30 to 60. Since most people don’t die in that age span, most policies don’t pay out. The 20 policies that don’t pay out for every one that does cover the costs. Plus, those $40/mo are invested by the insurance company and grow beyond just setting aside the money.

For term life insurance the bet is if you give 10,000 people coverage for 10 years, for $40/month each, you’ll have $48 million in revenue, and pay out perhaps $45 million in claims. You’ll also get to earn some interest because the majority of the deaths will likely happen later in the 10 years rather than evenly across the whole period.