How does life insurance work??

[jono1887]

You pay a small fee per week and when you die.... they pay out 100k+
Where does this 100k come from? If you pay $10/week for 40yrs thats only 21k

 

[NeuromanceR]

If you pay $10/week for 40yrs thats only 21k

There are millions of other people paying that $10 a week...

 

[prawn_86]

There are millions of other people paying that $10 a week...

Yes but if they all die then they all have to get paid out...

I too would like to know how it works, because even with compounding it doesnt equate. Unless they just dont pay some claims (suicide etc), but i still wouldnt have thought it makes up that much of a gap.

 

[jono1887]

Yes but if they all die then they all have to get paid out...

I too would like to know how it works, because even with compounding it doesnt equate. Unless they just dont pay some claims (suicide etc), but i still wouldnt have thought it makes up that much of a gap.

exactly... its not like car insurance where there is a % that will have accidents and a % that wont. With life insurance, EVERYONE will die... so they must know they're gonna pay out everyone

 

[skyQuake]

$10/week for 40yrs Compounded at 6% (assume 6% risk free rate on average over 40 yrs)
=around 0.125% a week

=10*((1.00125)^(52*40)-1)/0.00125
=$100k ish

http://en.wikipedia.org/wiki/Annuity_(finance_theory)

Also, they can invest it in things that are > 6% - eg. shares etc
And I really like their business model in that you get your money only when you die... I'm sure there have been plenty of cases of people dying and no-one going to claim their money due to ignorance/no relatives.

 

[gooner]

The premium paid is based on risk of death. I pay $80 a month for $700k insurance as a 46 year old. If I was now 70, the premium for $700k of coverage could be $4,000 a month due to the high risk of dying. Thus most people stop insurance once they get to a certain age as they can no longer afford it.

 

[prawn_86]

Ahh, makes sense now.

Good question Jono

 

[jono1887]

$10/week for 40yrs Compounded at 6% (assume 6% risk free rate on average over 40 yrs)
=around 0.125% a week

=10*((1.00125)^(52*40)-1)/0.00125
=$100k ish

http://en.wikipedia.org/wiki/Annuity_(finance_theory)

Also, they can invest it in things that are > 6% - eg. shares etc
And I really like their business model in that you get your money only when you die... I'm sure there have been plenty of cases of people dying and no-one going to claim their money due to ignorance/no relatives.

hmm... i guess so. But will all their customers survive past 40 years. Say the average customer age is 30-35 (people with families) that would mean they would have to live until they're 70-75... thats quite a big ask isn't it?

and I've heard of life insurance companies that charge less than $10 a week ('for only the cost of a cup of coffee week' ).

But if this is the case, why don't people just save the amount they would be paying into life insurance policies into a term deposit and add more once a year... wouldnt that be the equivalent?

 

[jono1887]

The premium paid is based on risk of death. I pay $80 a month for $700k insurance as a 46 year old. If I was now 70, the premium for $700k of coverage could be $4,000 a month due to the high risk of dying. Thus most people stop insurance once they get to a certain age as they can no longer afford it.

oh ok... makes sense. So the prices they're quoting on those tv adds are just for young people...

 

[investorpaul]

The premium paid is based on risk of death. I pay $80 a month for $700k insurance as a 46 year old. If I was now 70, the premium for $700k of coverage could be $4,000 a month due to the high risk of dying. Thus most people stop insurance once they get to a certain age as they can no longer afford it.

So basically life insurance is only to cover you when you are young/middle aged. Ie. if you die during this period your family has money to look after themselves and your wife/husband has money to provide for the kids.

Once you get older, you expect to die and because the insurance co and you expect to die within a shorter timer period (ie once you reach 75 it will on avg be within 10 to 15 yrs say), the cost increases and you basically say it costs $X a month but i don't need to provide for anyone any more so i will cancel it.

 

[mattlaw]

It also depends on what kind of premium structure that you have as there are 2 different ways to have it.
The first is a stepped premium which increases with your age and by the time you reach retirement age 60-65 it is too expensive to keep paying.

The second is a level premium which stays the same amount each year until you reach 65 and then it automatically converts to a stepped premium, which is too expensive to keep paying.

So while having life insurance is cheap when you are younger by the time you reach age 65 it becomes so expensive that people stop paying the premiums.

Also with the insurance on midday television there are usually very specific restrictions on them e.g. if you are killed outside of Australia they dont pay out.

 

[skyQuake]

hmm... i guess so. But will all their customers survive past 40 years. Say the average customer age is 30-35 (people with families) that would mean they would have to live until they're 70-75... thats quite a big ask isn't it?

and I've heard of life insurance companies that charge less than $10 a week ('for only the cost of a cup of coffee week' ).

But if this is the case, why don't people just save the amount they would be paying into life insurance policies into a term deposit and add more once a year... wouldnt that be the equivalent?

Would be similar but you might be charged fees, tax etc. With life insurers its like a roundabout way to avoid some tax... by dying
Also they have a far more diverse range of assets to invest in, and ability to package and resell those baskets of repayments to others for a tidy profit

 

[Krusty the Klown]

You will probably find that "life" cover only covers you until age 65 or 70. You may be able to get accidental death cover after that age, but not death from any other means.

It will be in the fine print somewhere.

So, as the majority of people in Australia, don't die until after 65, that is how the insurance company's make profit, and yes they do invest the premiums.

They have a claim "pool" of funds set aside for payouts at any one time, and the rest is invested, thus they make profit on the returns.

You should find that life cover is the cheapest form of cover, with total permanent disability, trauma cover and income protection increasing in premium cost in that order as there is more likelihood of a person making a claim on a policy in that order.

 

[awg]

Insurance companies employ properly qualified Maths graduates as Actuaries.

They work out the tables

I have had occasion to remark to people, including myself, when they ask about financial matters, especially Super, that the first thing you have to decide is "how long you are likely to live"

An example is the Super pension tables, I am expected to live another 36 years.

My own calculations differ, unfortunately.

I had to make decisions based on my expected lifespan, and I know how long I have to last till I'm ahead, (unless the govt change the regulations)

 

[gav]

I recently signed up for both life insurance and mortgage insurance. It may not be for everyone, but certainly suits my situation. For me, it is simply risk management.

I've just bought a house and whilst my g/f is studying I am the sole contributer to the mortgage. If I was severely injurred and unable to work, we'd lose the house. If I died, there is no way my g/f could make repayments so she'd lose the house.

For life insurance, I don't need to be dead to receive the payout. Permanent disability also = payout. For $30 per month I have enough cover to pay out my mortgage, plus $50K left over for anything else (medical expenses, etc).

As well as life insurance, if I am no longer able to work my income insurance will pay 75% of my income for the rest of my working life - either fortnightly or in lump sum (CPI adjusted). This costs me $51 per month. If I lose my job, it will pay for 4 months of mortgage repayments. Income insurance is also tax deductable.

If I had no mortgage, I'd probably just have income insurance.

 

[Krusty the Klown]

There is such a thing as too much life insurance, don't listen to life insurance salesmen!!! (although everyone probably knows that already)

Not referring to you gav, seems a sensible amount of cover.

 

[gooner]

There is such a thing as too much life insurance, don't listen to life insurance salesmen!!! (although everyone probably knows that already)

The more you want, the harder it is to get, unless you are a very high income earner and have an expensive wife and kids to support. If you are an average Joe, the insurers think you are just going to get excessive insurance and then top yourself so support your family. So they won't let you have it.

 

[Prospector]

I also encourage my family to get Life Insurance as soon as they start working, even if they have few assets. My partner was employed in the Life Insurance Industry and he had access to cheap Life Insurance which he took up. Less than 12 months later, he was diagnosed with Cancer. Thankfully he (or I guess, I) didnt need to claim on the Policy, but it was another 20 years before he could take out another Life Insurance Policy because of these 'pre-existing' issues.

 

[Krusty the Klown]

The more you want, the harder it is to get, unless you are a very high income earner and have an expensive wife and kids to support. If you are an average Joe, the insurers think you are just going to get excessive insurance and then top yourself so support your family. So they won't let you have it.

That's true

I believe they set the limit for Joe Average at about $1.5M to $2M, which would be the average wage earner's income to age 65.

I should have elaborated earlier - even if you have $2M in cover with one company, the salesmen will say - no, not enough, you need another $1M with MY insurer.

Sometimes $100K in cover is enough, say if you have no debt and own a business to pass on to your family. Sometimes no need for cover at all !!!

 

[trading_rookie]

For all those with Life Insurance, check if you have cover during either a declared or undeclared war. I believe most policies are void or offer limited cover.

As for disability insurance, check if it Owner Occupation or Any Occupation...from memory if it's any occupation will make it harder to get paid out - eg: doctor who due to hand injury can't perform ops anymore but can still do general practice won't get a pay out. But if he was covered for Owner Occupation he would.