How does life insurance work?
I know the basics like what it actually is however I always hear these commercials and radio advertisements saying you can get a half a million dollar policy for $20 a month and things like that. How does the company actually make any money? Even if yo were paying $1000 a month there’s no way you could get to a half a million with interest rates and the stock market.
It is a numbers game. Most of those ads are for term life policies, which only pay a benefit while you pay the premium. And there is a term, usually like 10 years, after which the premiums on term policies usually skyrocket. But basically, they have millions of people pay $20/mo, but to get that rate you need to be young and in good health, no diabetes, non-smoker, etc. so very few of these people die and collect. After the term, many, if not most, drop out when the premium increases. Thus the company has collected $20/mo for 10 years, or $2,400 and never paid out a dime. Believe me, they have people called actuaries who calculate the rates they need to charge, it is all about group statistics. For a description of other life insurance types check
http://www.fool.com/personal-finance/insurance/2006/05/08/whole-life-vs-term-life.aspx
It is a numbers game. Most of those ads are for term life policies, which only pay a benefit while you pay the premium. And there is a term, usually like 10 years, after which the premiums on term policies usually skyrocket. But basically, they have millions of people pay $20/mo, but to get that rate you need to be young and in good health, no diabetes, non-smoker, etc. so very few of these people die and collect. After the term, many, if not most, drop out when the premium increases. Thus the company has collected $20/mo for 10 years, or $2,400 and never paid out a dime. Believe me, they have people called actuaries who calculate the rates they need to charge, it is all about group statistics. For a description of other life insurance types check
http://www.fool.com/personal-finance/insurance/2006/05/08/whole-life-vs-term-life.aspx
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You do not get to keep the life insurance policy forever at that price. It is very unlikely that you will die while paying that price. Usually, you live long enough for the price to go up, so either you pay more or you lose the insurance.
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