Obviously i understand how insurance works, but how the hell does life insurance work considering everyone is going to die? I see so many companies offering what ludacris amounts of money for tiny weekly/monthly payments. How do the insurance companies actually make money?
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Yeah life insurance is only cheap when you start a plan in your early 20’s with great health.
Most plans are either for a fixed term (say for like 5 years after the plan starts), or the costs increase dramatically (or the insurer refuses coverage) as one gets older.
Following to find out also.
My understanding is there are two types a fix term and non fixed term (I don’t know the phrase) basically with a fix term you pay x amount for the term. If you pass away you are cover, if you don’t then you ‘loose’ what you have paid and have to take a new policy out.
The amount you ‘pay’ is based on the risk of you as a person. For example how active you are, healthy etc.
I do hope someone else adds more here as I only understand a little bit but in all honesty keep getting out off purchasing because it’s a minefield.
As others have said, most life insurance is “term” life insurance that is good for a set amount of time: 10 years, 20, 30, etc. You pay a flat premium for that amount of time, and at the end of the term the insurance expires (or the premium skyrockets).
With term life, you will never come close to paying the insurance company as much as you’d get if you died…a $100,000 policy over 30 years might cost you a total of less than $10,000 if you were young and perfectly healthy.
Life insurance companies make money because
* The overwhelming majority of people outlive their term, and all that money was “wasted” (you were effectively paying for peace of mind, which is kind of the point of insurance)
* Many many other policies lapse because the insured stopped paying premiums…think about how many times you forget or almost forget to pay your rent or your cable bill, and multiply that over decades where even if you were auto-billing it might have been to an account you stopped maintaining
* A fair percentages of clients do actually die while holding an active policy, but they neglected to tell anyone they *had* a policy (it’s up to the beneficiary to make a claim, it’s not like insurance companies browse through the obituaries every morning)
* This is not common, but some people die and their beneficiaries make a claim, but the insurance company investigates and discovers the client was not fully honest about their situation (like they had cancer but somehow kept it from the company) and doesn’t pay out
So after all that, if someone does die and their beneficiaries receive $1,000,000, that’s easily paid for by all the other policies that didn’t pan out. My biggest client is an agency which has placed tens of thousands of policies over the last five years, and they have four claims on their books.
Life insurance policies usually only last for a period of time, not for the rest of your life. You buy it for 5 or 10 years, or whatever.
And when you are at higher risk of dying (by being elderly, or a smoker, or a motorcycle rider), life insurance costs a whole lot more. Life insurance doesn’t cost the same for every single customer, it’s based on how likely you are to die.
A life insurance company makes money because the majority of their customers *won’t* die during the time they are insured, they’ll pay their premiums but with good luck, they don’t die, and so the insurance never has to pay out. A few customers will die, and the insurance company has to pay out despite receiving only a little bit of money in premiums from the customer before they died. But this is offset by the premiums coming in from all their other customers, most of whom won’t die.
You buy insurance because you are *insuring* your dependents’ financial security in the event of your untimely death. Hopefully you won’t die and won’t have needed the insurance, but you can’t know that in advance, you could always get hit by a car or randomly get cancer and die before your time. This is a *risk* you don’t want your family to be put under, so you buy life insurance so that if you do get unlucky, they won’t be financially ruined by the sudden loss of a breadwinner. You’re paying for peace of mind. Insurance is not a financial investment where you hope to earn more money than you put in.
People underestimate the impact of investments in the insurance equation. Even if the insurance company ends up paying out more to your survivors than you paid in during your life, they’ve had five or ten or fifty years to invest the premium you paid in; they have made a *lot* of money on those investments in the meantime.
This is true of pretty much all insurance, especially as it becomes more commoditized. Most P&C insurance companies actually take a slight loss if you just compare the amount they take in from premiums and the amount they pay out for claims. They remain (insanely) profitable because of the investments in between.
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