How do insurance companies make money on life ins?

Patman

Staff member
Joined
May 27, 2002
Messages
22,020
Location
Guelph, Ontario
This is something that I've been wondering about for a while now, how can an insurance company possibly make money selling life insurance?? Take my own policies for example. My wife and I pay roughly $20 per month for each of our $200,000 policies. And without a doubt, we will both die someday so our insurance company will eventually have to pay out $400,000. But yet the total of our premiums will never come even close to $400,000! For example, if we paid into the plan for 50 years, our total for the premiums is only $24,000. So even if the insurance company is investing the money we're giving them every month, they can't possibly turn $24,000 into more than $400,000 in order to turn a profit. So how on earth do they do it? Or is life insurance something they always lose money on, and they make it up with the other types of policies they sell such as home and car insurance?
 
Joined
Jan 10, 2008
Messages
4,998
Location
Milwaukee, WI
Time value of money. The insurance company does invest the money and with large sums of money little regulation they can earn rates that you or I cannot. That, and the fact that your premium will go up.
 
Joined
Sep 4, 2006
Messages
5,153
Location
MW
Plus it's an ongoing operations. Think of insurance as a bucket - moneys come in and moneys go out. The issue is to make sure that the inflow is larger than the outflow. Your premium is calculated that during your lifetime, the risk adjusted time value of it is more than the eventual outflow. Check out the Future Value and Present Value concepts on sites like Investopedia.com. Then you can run a calculation of what the future value of your premiums is. You will have to estimate your expected life and the discount rate (normally 14% in for-profit corporations). Just remember that a dollar today is more valuable than a dollar tomorrow.
 
Joined
Aug 15, 2008
Messages
4,966
Your insurance company needs to make sure its customers are living and paying into the fund and not dying!
 
Joined
Jan 29, 2009
Messages
2,804
Location
NJ
They invest your 24k and turn it into 800k. Besides then at time of death they will try to weasel their way out of paying the full amount, what you do get the government will take a % away. Death and Taxes, all we have to look forward to. As stated in a previous post, its a bucket. Also they almost make it "mandatory" and speak of having to be sure you can cover a funeral cost which can exceed or be the same as a wedding.
 
Last edited:
Joined
Jul 9, 2008
Messages
715
Location
Ks
At that price, its a term policy or you've had it the policy since you were very young. Term policies prices go up quickly when you get older. At some point, you no longer consider the term policy worth the cost, and quit having life insurance. Whole life policies are basically priced like: term policy price + contribution to a high-fee/low-return investment. If you manage your money remotely well, you're far better off buying term life policies and investing the difference. By the time the term policy prices go up, your investments are worth more than the policy, and you don't pay the higher rates. IIRC, insurance salesmen get 40-50% of the first year's premium when they sell a whole life policy (plus more each year). Commissions that fat should tell you something about how fat the profit margins are!
 
Joined
May 29, 2009
Messages
610
Location
Afghanistan
easy, when you're 70, they cut you off term insurance. whole life insurance is different, basically a very expensive investment account. some places cut you off at 80. my dad died at 82. usually if you are well off enough to afford insurance, that puts you into a higher socio economic class. the lower classes, cannot afford insurance, and are not covered with health insurance either. they simply die off early. the more well off people like yourself that buy insurance, usually also have health insurance, and will die after the insurance expires. that is why they can pay the CEO several hundred million dollar bonuses. don't worry about them, not only can they afford it, they make LOTS of money on the deal. also, the premiums for term insurance keep going up and up and up as you get older, so eventually you are forced to quit paying, because you can't afford the premiums anymore. they got you, both coming, and going.
 
Last edited:
Joined
Sep 13, 2003
Messages
5,928
Location
Waterloo, ON
Patman, I live in Waterloo and sell life insurance. Sounds like you have term insruance that will see rates go up at some point, You many have permanent insurance if it was taken out when you where a child. (not likely as you said your wife has same policy) Keep in mind only 3% of term ploicies are ever paid out by the companies and most people will cancel it when the need it gone. Many people also cash out their permanent policies as some point if they need money, or if the benificiary dies before they do,,,
 
Joined
Aug 21, 2008
Messages
25,050
Location
ON, Canada eh?
 Originally Posted By: Anies
They invest your 24k and turn it into 800k. Besides then at time of death they will try to weasel their way out of paying the full amount, what you do get the government will take a % away. Death and Taxes, all we have to look forward to. ...
In Canada any insurance benefits (including life insurance) are tax free, is this not the same south of the border? On another note, my parents bought a lifetime life insurance policy for me when I was born and the premiums are $20/month. My estate will collect over $100K when I die. Enough to bury me and some left over for the next generation. I bought Critical Ilness insurance for myself at the sugguestion of my financial advisor because premiums are cheap because of my age and will help protect me financially should I suddenly get sick and/or can no longer work. Costs me $80/month but I'm covered for $200K paid out 30 days after diagnosis of a critical illness or health impairment. (a 2 page list of things covered) I can also get back all my premiums I paid since day one at anytime after 15 years should I decide to cancel the policy. Pretty cheap insurance! I worked it out and I would have to live to 208 years of age for them to break even on my premiums so to speak. So I figure I will keep it for life and when I do have a stroke etc. at my frail age of whatever at least I get a fat cheque for $200K to make me happy! Also I get the piece of mind knowing that if I get critically i will have the money I need to support myself while I get through it and/or to pay off whats left on a mortgage etc. ;\) I sleep better at night knowing I'm looked after if I need it!
 
Joined
Jul 9, 2008
Messages
715
Location
Ks
 Originally Posted By: StevieC
In Canada any any insurance benefits (including life insurance) are tax free, is this not the same south of the border?
Yes, and estate planning (a.k.a. tax avoidance) is one of the few places where a competitively priced whole life policy can make financial sense. The very old often buy whole life policies for close the face value of the policy, because the fees are less than inheritance taxes. There might be limits on how much is tax free though... I've never looked into it.
 
Joined
Dec 10, 2002
Messages
9,366
Location
USA
It's like social security, it's a big ponzi scheme. oops, did I say that?
 
Last edited:
Joined
May 28, 2007
Messages
5,577
Location
earth
 Originally Posted By: hate2work
They hire math proficient employees (they call them actuaries) to do life span calculations. It actually gets pretty involved. But trust me, they make tons of money. http://en.wikipedia.org/wiki/Life_table
i've got another 51.8 years to live. that's ok. my sister is an actuary for a living. she's real smart. she makes insurers and pensions folk real rich.
 
Joined
Sep 9, 2003
Messages
2,636
Location
Arizona
I'd like to see your policies. At those rates they almost have to be term policies which mean they cease at some point. $200,000 in whole life coverage would be way more than $20/month.
 
Joined
Sep 28, 2002
Messages
39,802
Location
Pottstown, PA
Do any of you recall the commercial on the old FNN where the guy said "You can die rich"?? It was only good for estates that were worth $3M or more. But apparently you would buy $11M in term insurance that would go beyond your possible life span. They stopped showing the commercials at some point. The company's logo/emblem was something like this:
 
Joined
Apr 30, 2003
Messages
7,077
Location
Ontario, Canada
Another trick up their sleeve is to collect premiums, taking a small cut of each, until too many people start dying all at once (baby boomers 18 years from now), and then go bankrupt, so you younger folk get nothing.
 
Joined
Jun 11, 2002
Messages
3,346
Location
Clarksville, Tennessee
I don't know how life ins. works either. I'm a proponent of being self insured. Once the kids are out of the house (2 years) then I have no reason to take care of someone after my death. So hopefully I will drop my premiums at that time. I'll have plenty of assets that will give someone a good vacation when I'm gone. LOL.
 
Top