How do life Insurances work?
How is it that some one pays $50-$60 a month on a $700,000 life insurance, it doesn’t add up?
Tags: insurances, Life, WorkHow is it that some one pays $50-$60 a month on a $700,000 life insurance, it doesn’t add up?
Tags: insurances, Life, Work
It does make sense:
you pay $50 / month for 10 years. If the person lives past 10 years, then no life insurance benefit is payable. How many young people do you know die before age 35?
It’s how all insurance works…the people that aren’t dying make up for the people that do die.
Just like in medical insurance…how do you pay 100-300/month and are covered for a surgery that costs $100,000?
It’s because there’s so many people paying 100-300/month that don’t use any insurance, that they make up for the people who need a $100,000 surgery.
There’s TONS of match involved with pricing insurance. I’ll try a basic example:
Life insurance uses mortality tables, which are huge tables showing extremely predictable chances of death for every age group (all this data has been collected for many years). Last I checked, the chance of a 21 year old dying is 2/1000.
So say they offer a 100,000 face amount policy. So if the person dies, they have to pay out 100,000.
Now we’ll take a group of 1000 people (all age 21). The total amount the insurance company expects to pay is $200,000 dollars from that group (2 people dying * $100,000 for each death)
So the insurance company expects to pay $200,000 total from this group of 1,000 people. To figure out how much it would cost to price this group (just enough to cover the 200,000), they just divide.
200,000 / 1000 people = 200 dollars per person
Now divide that over 12 months, you get between $16-$17 dollars per month for each person.
As you can see, 1000 people paying 16-17$ a month, would be enough to cover 2 people dying, each receiving 100,000 each.
That’s a very basic example, and also doesn’t take into account administrative costs, or extra premium loading costs, but hopefully you get the idea.
Insurance works on the law of large numbers, so the more people you have, the more accurate your projections are, and the less fluctuations there are.
It does make sense. You don’t understand how insurance works. It’s called “shared risk.”
Hi,
I was looking into my insurance a couple of months ago. This site contains a great deal of helpful information:
http://wahhealthanddentalinsurance.blogspot.com/
It may be for a very short period of time and the person may be very young and in excellent health. If you’re 30 years old and buy 10-year term insurance, the premiums will be very low because your odds of dying in that 10-year term period is less than half of one percent.
But if you’re 65 years old and buy 20-year term insurance, your odds of dying before you hit 85 are pretty high — probably around 40%.