I got a piece of junk mail this morning that I quickly reviewed and threw in the trash, but I’ve been thinking about it. Clearly I don’t understand something, or else I’m misremembering the offer, because the numbers don’t add up–for the bank. Someone care to tell me where I’m overlooking something?
The bank (I think) offered to sell me $300,000 worth of insurance ($301,000, actually, because they were throwing $1,000 in for free) and they would deduct $4.50 per month for every $50,000 I bought. By my estimate, then, I would be paying $27 per month, or about $320 per year, for $300,000 of insurance money to be paid at my death. Since the only way I (or my heirs) don’t come out ahead is if I live 100 years or so, that seems pretty screwy, so I know I misunderstood something.
The only thing I can think of is that this isn’t life insurance they’re selling, it’s something more specialized (like insurance against accidental death, or death from a safe falling on my head, or something of that sort.) Has anyone gotten such an offer (it was from TD bank) and understood it better than I do?
I’ve never really understood life insurance, but the numbers seem about right. I have a $500,000 policy for about $800 per year and my dad had a $1,000,000 policy for about $1600 per year.
I suspect those are term insurance rates. In fact checking on line, those rates are right on for a 40-year old non-smoking male in good health for 20-year level term insurance.
Since it’s term insurance you heirs get the $301,000 only if you die within 20 years. At age 40 your life expectancy is much more than that. So the insurance company only pays off to a fraction of those who buy. That doesn’t mean it’s wrong or a bad deal. If you have minor children and want to provide for them until they come of age or what to provide money for a spouse until your pension would just about kick in m(assuming survivor benefits), it might be a good thing to do. If you wish to continue coverage after 20 years are over, your rates will be substantially higher (barring medical breakthroughs that greatly expand life expectancy).
So do they check your age before they send these offers out? Would they have to pay on someone who signed up the day after his doctor told him he had inoperable raging cancer?
I got a similar offer from my bank, and it was so good that I signed up. A few weeks or months later a bunch of paperwork arrived, and as I was reading it, that’s when I learned the difference between “life insurance” and “accidental death insurance”.
Until then, I had thought that “accidental death insurance” would cover any death except suicide (all other sorts of death being “not on purpose”). Now I understand the difference a lot better: Death from an illness, for example, does not count as an accident.
That was my thought too - it only covers accidents, and the older you get the odds of an accident go down, as you are less likely to be skydiving or driving recklessly than a 20yo. (Or… more likely than the 20yo to die from a non-covered illness before an accident gets you.)
It amuses me to see this sort of stuff sold on TV to older people. I wonder if they catch the “accidentaly death” bit.
Plus, the insurance premiums must eventually go up, or as others mentioned, the offer stops at a certain age. A lot of group benefit insurance, even for a spouse, quits coverage at 65.
$27 dollars in 1970 is $150 today. That’s 6-fold in 40 years and that doesn’t even count the interest that the bank makes by loaning out your $27. So the answer is that you’re paying 320 2011 dollars and your family receives 300,000 2055 dollars.
Sometimes in the fine print it says something like ‘limited benefits in the first two years’. Which means if you croak in the first two years, you just get your premiums back. This allows them to offer insurance without needing a medical check, but be protected from claims by people with pre-existing terminal illness.
Which is ok, because a lot of the need for insurance also goes away at 65. I am really glad I can buy cheap term life insurance now and protect my family, and not have my only option be a much more expensive whole life policy.
Yeah, I guess I do. I fished it out of yesterday’s trash and in really tiny print the insurance is specified as applying only to “a covered fatal accident.” So that’s the scam.
As I see it, there are three reasons banks offer things like that:
they get a commission from the insurance company that actually writes the policy.
if you die when you owe them money, the insurance money means the bank is more likely to get paid back.
insurance policies make money of their own - not only do some people die in ways that don’t pay out or cancel the policy before payback, but insurance companies are major investors and get a return on the money they hold.
To look more at the investment side, just think about one year’s premium. $320 over time. Let’s say that investments double the bank’s money every 10 years. After 30 years, the bank has $2,560. Looking at the other years, we could average it out and say that the bank has now received through premiums and investment returns $38,400.
Obviously, they’re still not making money if they had to pay out on 100% of their policies. However, it shows that they don’t need 100 or 1,000 years to break even.