How does life insurance work?

Question

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?

In: Other

Answer 1

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.