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

Question

I’m probably just stupid 😭

In: 4901

Answer 1

You **are not** guaranteed a $500,000 payout. You only get $500,000 **if you die during the term of the contract.**

Insurance contracts have time limits (terms) and you are only covered during that specific time limit. If you die **after** the term expires, you get nothing even if you already paid thousands of dollars in premiums.

Say Billy enters a life insurance contract that has a term of 2 years and the payments are $1000 a year ($2000 total). If Billy dies one year later, then his family gets paid out because he’s still within the 2 year term.

If Billy dies 2.5 years later, his family gets no money because the contract expired and the life insurance company essentially collected a free $2000 from his payments.

You’re confused because you think the payout is *guaranteed* (e.g., you pay $4800 and at some point you get $500,000) when it’s not. If you don’t die while the contract is active, you get nothing despite the premiums you paid.