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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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.
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