Maybe I just don’t understand what they’re doing. BUt it seems to me if I take out a 10 year policy that costs $100 per month, I’m betting that I’m going to die within that period of time and the company is betting that I won’t or that they won’t have to pay out. If I get to the end of that 10 year term, then I’m just out $12,000. What am I missing?
In: 116
Term Life policies primarily benefit the Insurance company and the commission of the selling agent. If the piece of mind has some value to the buyer then maybe there is some justification. Otherwise it’s a horrible economic decision.
It’s insurance, not a savings account. Your paying to offload the financial risk of you dying to someone else. Your paying to make sure that your family is financially taken care of if you die. Also, that $100 a month is very high.
The idea of a term policy is that it provides short term coverage. So for example let’s say you live in a single income household, have a young child, a stay at home spouse, and a mortgage with 20 years left on it. A term policy is intended to provide financial assistance for your family should you die before you’ve had enough time in the labor market to build a large savings to leave behind/cover your bills. Don’t think of it as a financial investment, because all insurance is a bad investment. The benefit offered by term insurance may or may not be of value to you, but it’s not intended to be a good financial investment.
Edit: a term life insurance policy offers the same benefit as a more expensive whole life policy, except doesn’t build value like a whole life policy does, and therefore is much cheaper to purchase.
Insurance is protection from something that you don’t want to happen but if it does happen has economic consequences for you or your family. You pay for peace of mind. Like car insurance I pay it not because I am betting on having an accident but because in the event that I do I am offsetting the consequences. Neither you nor the company want the event to happen but the company is willing to finance the risk cause they offset their own risk by insuring across a population or getting insurance themselves.
Term life insurance works like that. I don’t want to die but if I do I want to ensure my family is protected financially. The insurance company insures across a population to mitigate their risk. Your costs are lower than their potential payout but it works out for the most part.
[deleted]
It provides perhaps $1,000,000 in benefits for the unlucky people who die during that term. Most will survive and just pay the premium, which is how the premiums can be so low relative to the payouts.
I have one that is good until I’m 65. If I die before then my wife and eventual kids are taken care of. If not then my death is more expected and I have had time to prepare for it. For term life if I saved up the same amount every month it wouldn’t be nearly as much as what the payout would be from the insurance.
> What is the benefit of a seatbelt?
> It seems to me that if I wear a seatbelt I’m betting that I’ll get in a car accident. If I get to the end of my trip safely, I was uncomfortable for no reason.
> What am I missing?
Insurance is always to minimize downside risk. You have to decide whether the cost is worth it, for the case where it turns out to have been unneeded.
Another thing is you don’t get to choose how much it costs. And sometimes you don’t even get to choose the term length (e.g. people that the insurance company expects will have a high chance of dying during the term, will not be insurable for that term length).
But assuming that they do offer you a 10 year policy, your payment will be determined by their statistical analysis of how likely you are to die, which is why they ask you questions about your job, your lifestyle, do you smoke, do you have dangerous hobbies (e.g. skydiving, riding a motorcycle), etc.
Not to repeat what’s been already explained fairly well. If you’re someone who has decided you want a policy, you’re next step is how much.
Here’s a website to help, no ties to any companies or anything.
https://lifehappens.org/life-insurance-needs-calculator/
Latest Answers