How do life insurance companies make money?

[sao123]

Take note also...
all insurance policies have so many terms.... thay they make it incredibly difficult to collect...

Examples...
This policy is only worth 10% for the first year, 25% for the second... etc it takes like 3-5 years to earn the full value.
This policy is void if the insured individual commits suicide or the death was caused by insured's reckless behavior.

 

[FoBoT]

old people don't need life insurance

 

[Scarpozzi]

You pay life insurance your whole life....there's a restricted list of people that can receive a payout on your demise. Usually this is going to go to a spouse or child. There are instances where the whole family gets wiped out too....then they get out of payment because you only declare one or two people on the policy as recipients.

 

[Doggiedog]

Life insurance companies have a rough estimate of the chances of certain events occurring. For example, the chance that some one will get cancer in the US, in a certain age group, in a certain ethnicity would be 1 in XXX. They adjust the rates to make sure they are ahead when taking into account for the XXX. They take the premiums from the customers and invest them in instruments that gives them the required rate of return they need to stay ahead. Thus they make money. If they are wrong and they start losing money, they change the premiums.

In the case of property insurance, the payouts are not as often but when they are, they are huge. Take the Florida hurricanes for example. If you look at the balance sheets of property and casualty insurance companies, they have tons of cash but they will get depleted when something occurs. Funny thing is, most of these companies actually look forward to having some of these disasters occur because it gives them an excuse to raise rates which is why stocks of these companies usually go up after disasters and not down.

 

[Amused]

A large percentage of policy holders will default on their payments on whole life policies, thus canceling the policy before they die.

Term life is easy to figure out.

 

[SearchMaster]

My grandmother was convinced she was going to die in the 1960s, so she bought a $5K insurance policy. When she got through her "crisis", she didn't want to lose the money she had already put in the policy, so she kept paying. And paying. And paying. When she did eventually die 20 years later, she had put ~$40K into it in real money, not to mention future value dollars. And the $5K policy didn't pay for the funeral.

 

[DrPizza]

Originally posted by: mugs

Originally posted by: Brackis
Subsidized by work? Cost rises and/or benefits decrease over time.
Insurance is nothing more than gambling in my mind, the house always wins and will gladly pretend to be looking out for you when all they want is your cash.

I think NOT having most types of insurance is more like gambling than having it is. By not having insurance, you're playing the odds that something catastrophic will not happen. Odds are something catastrophic won't happen, but if it does you'd be screwed without insurance. If you were to get into an accident and have medical bills into the millions, I'm sure you'd appreciate your insurance company.

Yeah, they're there to make a profit like every business should, but they serve a necessary purpose.

Analogy (barely an analogy, nearly an identical situation in actuality):
extended warranty policies on purchases. If it breaks during the first 2 years, wow, they'll replace it! And, the warranty costs less than the cost of replacement. You're "gambling" if you don't have this extended warranty.

Also, in general (financial advisors, please chime in) whole life policies are undesireable. Instead, you should get term life which is relatively cheap. THEN, the difference in cost between the two policies should be invested. When you are older, you should *not* need life insurance at all. You should have more than enough invested to pay for final costs. Whole life is little more than an investment vehicle over which you have little control.

 

[StageLeft]

If life insurance pays your family $5k when you die and you paid them $1k/year in policies and you live for more than $5k they get profit.

 

[PingSpike]

This one's easy. The dead people never show up demanding their money after they die. Except for the zombies and vampires. But they are still pretty rare so they've hardly hurt profits at all.

Originally posted by: ElFenix
why isn't it called death insurance?

The same reason car insurance isn't called car crash insurance?

 

[spacejamz]

Originally posted by: Triumph
Well, I guess I understand it in principle, but still. My life insurance through work is something like 8 bucks per paycheck. I dunno if that's going to ever add up to the $20,000 in coverage that I have (or some number like that, actually I think it's more). That would take them 96 years to come out ahead.

So I guess the idea is to die before I turn 122 and I'll come out ahead!

but once you quit your job, you no longer have access to that insurance (so all the money you just paid is $$$ for them)...now imagine all the people in your company who pay for this life insurance through work who quit (before they die🙂) - all that $$$ goes to the insurance companies for pretty much not doing anything...

 

[rgwalt]

If you buy into a whole life policy when you are young, and you can lock in a good premium, you will end up coming out ahead at the end of your life. Buying term is really cheap when you are young, and really expensive as you get older. Life insurance companies make money because they spread their risk over such a large group of people that they have many years to use the money you pay them and invest it. They make money off these investments, and they make enough money to pay out on their policies and stay afloat.

I have a universal life policy. It allows me to lock in a good premium for the rest of my life, but it is cheaper than a whole life policy. I also have the option of buying more insurance down the line. Towards the end of my life, I would be able to cash in the policy for some certain amount of cash value. Essentially it is a savings account that my life insurance company sets up for me, and it earns interest. When I'm young, the premiums for my $50K in life insurance are very low, so very little money is deducted from the account and I add to the principle with my premiums and the interest that accumulates. You can set the policy up to gain cash value your entire life and eventually be worth more than the benefit (at which point you could cash it out), or you set it up to zero out the "savings account" to zero out at some point, effectively ending the policy unless you want to pick up the full premium payment. It all depends on how much you want to pay and how much risk you want to assume.

R

 

[rgwalt]

Originally posted by: Triumph
Well, I guess I understand it in principle, but still. My life insurance through work is something like 8 bucks per paycheck. I dunno if that's going to ever add up to the $20,000 in coverage that I have (or some number like that, actually I think it's more). That would take them 96 years to come out ahead.

So I guess the idea is to die before I turn 122 and I'll come out ahead!

The insurance company will still come out way ahead even if you live that long (and keep your job that long, and keep paying $8 per paycheck) because they will have invested all your payments and earned dividends on them.

R

 

[rgwalt]

Originally posted by: Brackis

Originally posted by: Triumph
Well, I guess I understand it in principle, but still. My life insurance through work is something like 8 bucks per paycheck. I dunno if that's going to ever add up to the $20,000 in coverage that I have (or some number like that, actually I think it's more). That would take them 96 years to come out ahead.

So I guess the idea is to die before I turn 122 and I'll come out ahead!

Subsidized by work? Cost rises and/or benefits decrease over time.
Insurance is nothing more than gambling in my mind, the house always wins and will gladly pretend to be looking out for you when all they want is your cash.

Not having insurance is also a big gamble. I pay out $2300 a year in insurance alone. It breaks down to:

$1200 in car insurance per year
$700 in health insurance
$300 life insurance
$100 renters insurance

Now, I could invest this money and self insure, but I can't spread my risk out to multiple people. I assume all the risk MYSELF. Since I started paying my own car insurance, I've cost my car insurance company something around $75K. Now, I could have gone uninsured (if it wasn't the law that I must have insurance), invested the money, but I definitely would not have come out ahead. I would have been screwed.

On the other hand, I barely use any of my health insurance benefits. I use maybe $50 or $100 in persciption and Dr visit benefits per year. However, I don't expect to come out ahead. What I'm worried about is needing to spend a week in the hostpital if I ever got really sick, or needed a trip to the emergency room. I couldn't cover that kind of cost myself.

It is gambling, but I'd much rather pay a company and spread my risk out over a group of policy holders than assume all my risk myself.

R

 

[Kenazo]

My wife and I each have 100k coverage and are paying around $250/year for it. We're happy. This way if either of us dies and say we have a kid at that point in time we can stay home with them until they're in school.

 

[rgwalt]

Originally posted by: Kenazo
My wife and I each have 100k coverage and are paying around $250/year for it. We're happy. This way if either of us dies and say we have a kid at that point in time we can stay home with them until they're in school.

Are you sure $100K would let you do that? How much are you pulling in collectively? You should plan to insure to pay off all debts (house, cars, credit cards) plus have enough insurance to replace 5 years of lost income. At least, that is the rule of thumb that I've heard.

R

 

[Kenazo]

Originally posted by: rgwalt

Originally posted by: Kenazo
My wife and I each have 100k coverage and are paying around $250/year for it. We're happy. This way if either of us dies and say we have a kid at that point in time we can stay home with them until they're in school.

Are you sure $100K would let you do that? How much are you pulling in collectively? You should plan to insure to pay off all debts (house, cars, credit cards) plus have enough insurance to replace 5 years of lost income. At least, that is the rule of thumb that I've heard.

R

Oh yeah, we do also have insurance on our mortgage, so that would be paid off if either of us died. Credit card debt is a non-issue (we pay off our balance monthly), The only other debt is about 6k on the car.

would 100k cover 5 years, no, but my wife and I both aren't pulling in huge salaries, so it would replace 4 years of lost income from the deceased spouse. I'm a junior accountant at a small firm so I started at a crappy wage, but as my wage rises (I'm expecting it to double within the next 5 years), then I'll also insure myself more, possibly with term insurance that would cover me until my kids are over 18, or something along those lines. we'll see when the time comes.

 

[marvdmartian]

Maybe they take out a policy on every one of their policy holders, but with a different company, and in a higher amount than what their policy holders have?? That way, when a policy holder dies, they pay out less than what they receive!! 😉