Term life insurance query

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S_YAGNESH
Posts: 8
Joined: Sat Oct 13, 2012 3:08 pm

Term life insurance query

Post by S_YAGNESH »

Hi experts,

I am planning to buy a term life insurance. Based on my research here and outside it looks like a term life insurance for 10 years and $600K would cost me anywhere between $17 - $20/month. Firstly thank you for the suggestions and education on the different insurance options. Without this I would still be scratching my head about this whole insurance thing. The more I think the more questions I get in my mind and I turn to this wonderful forum for the top 2 questions that are in my mind right now:

1. What would happen to my coverage if I am to cancel my policy midway? Is there penalty for cancellation or would my policy just elapse?
2. Assuming that I paid $20/month for a $600K and 10 year term life, I would end up paying a total of $2400 for 10 years. Given that this is no where near the total coverage of my policy, how do insurance companies make profit out of this? If they have to payout the death benefit for 1 subscriber they would have to cover their losses by adding 250 subscribers and this is not even considering the time value of money. I am sure I am missing something but cannot get my head around it.

Could someone throw some light?

Thanks
Yagnesh
MN Finance
Posts: 1926
Joined: Sat Dec 22, 2012 9:46 am

Re: Term life insurance query

Post by MN Finance »

If you stop paying your premiums your policy lapses and is effectively cancelled. Theres a 30 day grace period if you miss a payment. No "penalty" other than you no longer have coverage and would have to reapply if you still want it. I would pay annually not monthly (typically lower cost and easier to avoid accidental lapse). If it takes 250 policies to break even on costs, then clearly the odds of someone in your demographic dying are much lower, like 1 in 500, so thats where they make money
Grt2bOutdoors
Posts: 25617
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Term life insurance query

Post by Grt2bOutdoors »

S_YAGNESH wrote:Hi experts,

I am planning to buy a term life insurance. Based on my research here and outside it looks like a term life insurance for 10 years and $600K would cost me anywhere between $17 - $20/month. Firstly thank you for the suggestions and education on the different insurance options. Without this I would still be scratching my head about this whole insurance thing. The more I think the more questions I get in my mind and I turn to this wonderful forum for the top 2 questions that are in my mind right now:

1. What would happen to my coverage if I am to cancel my policy midway? Is there penalty for cancellation or would my policy just elapse?
2. Assuming that I paid $20/month for a $600K and 10 year term life, I would end up paying a total of $2400 for 10 years. Given that this is no where near the total coverage of my policy, how do insurance companies make profit out of this? If they have to payout the death benefit for 1 subscriber they would have to cover their losses by adding 250 subscribers and this is not even considering the time value of money. I am sure I am missing something but cannot get my head around it.

Could someone throw some light?

Thanks
Yagnesh
1. Stop paying your premiums and your coverage will lapse. There is no penalty for cancelling.

2. Most folks do not die within ten years of purchasing the policy, hence what you deem is a low rate is actually proven by actuarial calculations and studies. Insurance companies are not obtuse, they spend vast amounts of time studying statistics and likelihoods of death occurring at each age of the normal lifecycle. You did not state your age, but I'm guessing you are in your 20's or early 30's. For that age bracket, the risk of leaving earth for the great beyond is not as high as it would be for someone who is 50+. If you are purchasing the the ten year in lieu of a 20 or 30 year in the thought you will be saving money, guess again. A lot can occur over ten years including health deterioration, after the first policy elapses, you will be re-rated by the insurance company based on gender, age, profession, health status - premiums tend to rise over time as you get older.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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