I’ve seen alot of ads for life insurance, and although I haven’t had any experience with it myself, I gather you pay into it and if you die they give money to beneficiaries to pay funeral bills and whatever other expences come up, but heres what I don’t get, the commecials make claims that you can get something like a $100,000 policy for 75 cents a day. It seems the only way that could be profitable for them is if you live another 400 or so years after got the policy.
That comes out to about $2.25 per 1,000 unit of coverage per month. Which isn't too bad for individual coverage. In comparision I pay Aena .20 per $1,000 unit per month for our group life coverge at work. Annually I pay them about $96,000 per year for the coverage. We haven’t had an employee die for about 2 years (knock on wood), so Aetna isn’t doing too badly on the deal. Maybe an actuary or underwriter could chime in on the law of large numbers and risk pools.
So they’re just lying in their commercial?
There are two categories of life insurance, term, and whole life.
Term life insurance, also called temporary insurance, covers a person against death for a limited time, the term. For example, the term might be until children are grown, or until college is paid for, or until retirement. You pay for the policy period and at the end of the term, the contract or policy expires. If no claims are made against the policy during the term, you don’t receive any benefits after the policy expires, just like auto or homeowners insurance.
Whole life insurance, also called permanent insurance, is permanent and does not expire (assuming you continue to pay the premiums). It provides coverage similar to term insurance, but it also provides an investment vehicle. A portion of the premium goes toward insuring your life while the other goes toward an investment account. This investment account can be either an interest bearing account or a stocks and bonds investment account.
In the scenario you described above, the insurance in question is term. The insurance company takes a rather educated gamble that you won’t die during the life of the policy. Yes, it is a bit of a risk to the insurance company, but by examining actuary tables, your lifestyle risks, etc., they do minimize the risk to themselves.
An example. If 1 in 1000 people in a particular lifestyle risk group dies between the age of 54 and 55, and the term stops on a person’s 55th birthday, then assuming each of the 1000 people paid $0.75 per day (or $273.75 per year) and the insurance company had to pay out $100,000 for one person’s death benefits, they’ve still managed to make a profit of $173.75 in the past year.
Insurance companies also use the money that they’ve received for insurance premiums for investing. Therefore, not only do they get a profit from people living, they get a profit from being able to use the money while it’s in their possession.
Hope that helped some. 
My guess here is that they are quoting that price for term insurance…
That’s probably the rate for the lowest risk 15 year term policy for someone 30 years old… So if he pays them $275 a year for 15 years he’s given them about $4000 dollars … since most people in that bracket aren’t going to die before they are 45 …
So if you have 100 people on this plan company gets 400,000 dollars.
One dies before they reach 45 so they pay out 100,000 dollars. Not bad eh?
Now if you smoke or skydive or drive race cars that rate is likely to go up exponentially…
This is my understanding but I’m sure someone truly in the know will be by soon
correction. $173,750 should be the profit for the past year, rather than $173.75 Darn decimals! lol
Well amberlei explained it much better and if it weren’t a simulpost I would have never submitted mine
Alright, I see now. I didn’t realise there was a limit to how long you are covered. So is there a limit to how old of a person they will cover with term life insurance?
emcee wrote
So they’re just lying in their commercial?
No, I was just expressing the $.75 per day for $100,000 of term life coverage as a monthly premium per $1,000 of coverage. Or trying to anyway. I just woke up and may have screwed up the math.
I’m not sure what the limit is for age but keep in mind the premiums go up as you get older… you might see that 75 cents a day end up a few dollars a day.
We chose 20 year term over whole life as it is cheaper right now and because I’m a stay home mom with a toddler and one on the way. We wanted something that would protect the kids should something happen (they won’t be homeless or have to quit college or whatever) but once they are grown and out of the house we won’t need that kind of coverage so why pay for it? I’d like to think that in 20 years the house will be almost paid for and I’ll be working again and things will be very different.
My corporate employer required us to have a minimumof $10,000 term life insurance that we paid for out of our benefit dollars. I tried to use the money for other benefits, not allowed. “You need it to pay your debts”–no debts. “For your children”–no children. “For your own good”–wtf? they never did anything out of pure niceness. You could also sign up for larger insurance, and a lot of the employees did.
Once a year they would have a big Process where workforce concerns were discussed, defined, agreed upon by the group, and transmitted upwards. I had done the numbers and calculated that for the deal to be reasonable, maybe 4 out of every thousand employees per year would have to be dying on the job, and that wasn’t happening.
I brought this up a couple of times, but had no success in getting agreement till I called a life insurance company and found out that that premium would buy $150,000 coverage instead of $10,000, and told everyone. We got the issue specifically worded and sent it out, and in about a year they stopped the requirement.
I’m still not sure how profiteering works with benefit dollars, but it sure resembled a payroll kickback scheme. There were over 20,000 employees nationwide.
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Their commercial probably says that you “can” get the policy for that low a premium. “Can” as in “may be able to if you meet their criteria.” Their criteria will almost certainly be related to age, health, and habits (smoking, sky-diving, etc) and the premium will increase each year.
If you are employed, the best (that is, cheapest and yet reliable) life insurance is probably available through your employer’s program. Many employers allow employees to purchase additional insurance at their group rates (the employer gets a “fleet discount”, so to speak.)
If you are not employed, try to find a group that has group rates. Many large charitable or membership-driven organizations offer such a thing – Elks, Moose, AAA, AARP, etc. Those rates will usually be low (again, a “fleet discount”) and the companies reliable.
I would be hesitant about buying insurance based on an ad. There’s all kinds of complexities and potential scams that can lie underneath the glossy exterior. The worst scam is, of course, the question of reliability – you won’t be around to make a claim, your beneficiaries will have to do it. Will the insurance company still be there? will they honor the claim, or will they find very fine print that says it only pays the full amount you were killed by a falling piano? etc.