I’m in the process of sorting out life insurance for myself and I’m seriously confused about how the insurance industry works. I got an online quote from an insurance company in the UK and was given the figure of £10 a month for a 40-year package of £100,000 cover.
So (breaks out calculator) I pay the insurance company £4800 over the course of the policy and when (because it’s not an if) I die they pay my beneficiary £100,000.
HOW DOES THIS WORK? I’m clearly missing something here but having done some reserach I can’t find anything about the mechanics of insurance or how the companies who offer it are supposed to actually make any money off it. Obviously there are exclusions and situations where the companies don’t have to pay up so they can pocket the premiums they’ve been charging, and I’m sure the money you pay to them is invested in some fashion to generate more, but I just don’t understand how you can make a profit on being paid £4800 to dish out £100,000.
Lots of people end up canceling their policies before they die. For example, if their children grow up and are now financially independent, an insured person might no longer see the point of having a policy in place.
There’s also super weird shit like variable universal life insurance which nobody anywhere understands, and probably only makes a profit for some dweeb named Morton who works in a basement cubicle in Omaha.
The fact that you will die is a certainty. The timing of that death is not. There is an excellent chance that you will not die during the term of the policy.
If you take a million persons of a similar age, sex and whatnot as you the actuaries can crunch the numbers and tell us that X will die this year, Y will die next year etc.
From that you can calculate a base rate. To that base you will have add expenses. But on the good side, you (the insurance company) will have a pot of money to invest and that will reduce the premiums necessary to provide the death benefit.
Since you say it’s a 40 year policy - is it term life or whole life? In the USA, you can buy term life, which is for a set number of years, then it ends. So if you don’t die during that period, the insurance company keeps all your premiums and pays you nothing - which is how they stay in business. So a 25 year old in good health with no dangerous hobbies can get a $500,000 policy, 20 year term, for $245/year (using an online quote). That’s $4900 over the life of the policy. The company make their money because the huge majority of 25 year olds in good health with no dangerous hobbies will survive for 20 years.
Whole life insurance is a completely different beast, which costs a lot more, but covers you for your whole life. It’s generally not used for income replacement, like term life insurance.
What they said (I’ve written several Life Insurance ratings applications). They’re not betting that you won’t die, only that you won’t die during the time you are their customer.
From the OP I would assume it is level-premium AND level-benefit since he didn’t mention otherwise. Still, it is something to verify; a decreasing-benefit could help explain some policies.
It used to be that term policies could be cashed in ONLY by the policyholder’s death, but even that’s changing. Older policyholders may be offered a payout if the actuarial tables indicate that s/he’ll die before the term is up. It’s almost exactly like Deal Or No Deal. If an 80 year old customer has a policy for $500K, but statistics indicate a 20% they’ll die before the term expires, then the insurer might offer him a payout of $95K.
God, I’m surprised I still know this stuff. My first professional job was indexing insurance laws, but that was ages ago.
It has been described (paraphrased) as a sucker bet you’re making that you’ll die before your policy runs out. A bad risk is what the insurance company calls a sucker bet when you offer it to them.
Another factor is investments over the years. The insurance statutes describe in great detail what insurers are allowed to invest in, and what is off limits. They don’t just sit on the premiums they collect from you; they invest it.
I don’t remember what the laws say about funding the day-to-day business, and current payouts. I think these things have to be funded from investment profits, rather than from premiums being taken in now.
Not that much more. Assuming an interest rate of 4% annually, the total accumulated value of the premiums is a little over £11,600. So the insurance company is betting that there’s only about a 10% chance that beneficiaries will file a claim before the term expires.