Question about term insurance

I have seen numerous commercials for term insurance offering, say $500,000 or $700,00 insurance for, say, $30 a month.
I don’t see how this makes sense.
$30 a month is $360 a year, $3,600 in ten years, $18,000 in fifty years.
It is true that the insurance company gets the interest on the premiums as well as the premiums. And perhaps they no longer let you buy the insurance once you reach the age past which the large majority of people die.
Nonetheless, it still seems the insurance company would pay out much more than it takes in.
Obviously I am missing something. What?

That rate is for (say) a healthy 25-year-old with a term of 10 years, it’s not a rate that is fixed for life. It’s based on actuarial risk of death only between ages 25 and 35. For an older person, the rate will be higher.

My very basic layman’s understanding is laid out here, paragrah 2:

"Both term insurance and permanent insurance use the same mortality tables for calculating the cost of insurance, and provide a death benefit which is income tax free. However, the premium costs for term insurance are substantially lower than those for permanent insurance.

The reason the costs are substantially lower is that term programs may expire without paying out, while permanent programs must always pay out eventually. To address this, some permanent programs have built in cash accumulation vehicles to force the insured to “self-insure”, making the programs many times more expensive."

The insurance company is betting on you not dying before the term expires, you’re betting you do. Same time with accident insurance. Easy and cheap to buy, because you’re betting against carefully calculated risk factors that only the insurance company knows.

Also, when you are watching insurance commercials, look for the small print, “per unit”. The $30 a month might be for each 50 or 100 thousand.


What you’re missing is that insurance companies are in business to make money.

This may seem self-evident; you might say, “Of course they’re in business to make money!”

But since they offer insurance at what seems to you to be absurdly low rates, it is clear that they know more about the insurance business than you do. If they weren’t making money, they would not be offering insurance at such rates. You can bet your last dollar that they’ve done the math forwards, backwards, and upside down.

Another thing is that–in many cases–the premiums you hear on the ads are for very healthy non-smokers. Somebody who is in fine physical shape is as nearly-guaranteed to outlive the term of the insurance policy as anything in this life can be guaranteed. The insurance companies don’t pay out nearly as much on those polices (in aggregate) as you think they do.

That’s an unwarranted haughty lecture. Clearly OP is not missing the fact that insurance companies are in business to make money, nor does he remotely suggest that he knows more about the insurance business than they do. He says explicitly that he realizes he must be missing something about how these policies work, and is asking a straightforward factual question about what that is.

Lol, if insurance companies had to pay out on all their policies, they would go broke.

Another way to look at it is if the insurance company is offering a $30/mo premium for a 10-yr term policy on a $1m death benefit, they know the odds of you dying is well less than 1 in 277 (277 is the number of policies they would have to issue before the premium collected = 1 death benefit).

Is accidental death excluded? I’d expect that car accidents are the biggest cause of death for young adults.

They can offer 10 year Term Life cheaply to a 30 year old if it only covers death by disease.

It’s a pretty safe gamble that person will live for ten years.

Unless, there’s a flu pandemic. Then the insurance company will probably go broke.

Actuarial tables are fairly easy to find online.
From these ages, probability of dying within 10 years for the average man:

25 - 1.5%
35 - 2.1%
45 - 4.8%
55 - 11%
65 - 21%
75 - 45%

So you can see why you can get pretty cheap coverage for term life through early middle age.

Essentially, the part that OP is missing is that term rates will get dramatically more expensive past middle age.

Reported for forum change.


I was going to respond in much the same way.

Moving from CS to GQ.

[Also moderating]
Flyer, the abrasive tone is uncalled-for. The OP very clearly knew that insurance companies are in business to make money, and that there therefore must be some catch that he wasn’t aware of, or he wouldn’t have asked the question. Telling a person who’s asking a question that they don’t know the answer, without even giving the answer, is jerkish. Other users have been noticing that this seems to be a pattern for you. That pattern needs to stop. This is an official Warning.

Factor in, too, how many term policies expire without being paid out. I’ve always looked at insurance as a form of gambling (it’s a metaphor! ymmv). Even tho the house may pay out some large sums from time to time, the continuous inflow of money means the house always comes out ahead in the long run.

The only “catch” is that the OP did not bother to actually stop and THINK about the issue. There is no hint in his post that he is even the least bit aware of actuarial tables. If he had taken the time to logically and rationally think about the issue, his OP would have been significantly different.

Furthermore, if you had bothered to actually read my post, you would notice that I DID provide an answer. I explicitly pointed out that not everybody is eligible for the quoted rates.

I realize that my positions make me one of this board’s favorite whipping boys, but I suggest that you try reading for comprehension in the future, instead of knee-jerkingly giving me a warning.

Of course accidental deaths are included.

I have been told by insurance agents that the reason term insurance is cheap is that less than 2% of all policies actually get paid out. In almost all cases the insured cancels the policy (usually because of rising rates). So that $30 is almost all profit. Which everyone understands. What is usually not known is the percentage that is actually paid out.

I have permanent life insurance, which I first started through the military back in 1980. It started out at around $100 a year for $50,000. When I got out the service, I was allowed to keep the insurance and have been paying ever since. Every ten years or so the price slowly increased, but I just keep paying.

They finally allowed me to bump it up to $75,000, and it now costs me $400 a year.

To me it was (and is) easier than doing the term stuff and the others. Maybe I could have done better, but now I’m 56 and I can’t see any reason to change it.

I think the point has been touched on but to make it clear, term insurance guarantees a rate for a term. This may be something that the OP was unaware of. You are not bound in a contract to pay the premiums for the entire term, but the rates are locked in for the term. I have had two term policies. The first was for a term of 20 years. When I looked for insurance at the end of that term, that rates went up quite steeply.

No. However, my first term policy excluded accidents as a result of skydiving or flying a private plane. I believe death resulting from a military conflict are also excluded. My first term policy also required a physical exam.

Flyer, if you have an issue with the moderation, take it to ATMB.

There are a few other factors to consider. Most policyholders buy life insurance when they’re young, to provide for young children and a surviving spouse in the event of death. Later on, when the kids are grown and providing for themselves, many people no longer see the need for life insurance, and they stop it. So there’s no payout.

The OP asked if the insurer makes interest on the premiums while the policyholder is alive and paying. Yes, and not just interest. Insurance companies own stock in other companies, directly and indirectly through mutual funds.

Insurers also sell a variety of plans in which the policyholder sorta becomes an investor in the insurance company. That’s more complicated than I understand.

Then there’s re-insurance, where the company buys insurance from other companies against their own losses.