Ed Hinerman On Life Insurance

The Dirty Little Secret Of Life Insurance Really Isn’t!

August 16th, 2007

I mean really. What one of you hasn’t wondered at some point how a company can offer $500,000 worth of life insurance for for $14 per month. You die after 10 months (made the math easy on myself) and they’ve taken in $140 and paid out $500,000, a net loss of $499,860. Doesn’t sound like very good business to me.

Quick and simple! The majority of life insurance policies never pay a death benefit. I’m not talking about the majority, as in 51%. I would be surprised if 5% of policies actually pay a benefit. I can hear everyone screaming now about the dirt ball insurance companies not paying claims, but the truth is that nearly every claim filed is paid. There is an occasional fraudulent claim that doesn’t get paid, but those are rare.

So, why only 5%. I think the reasons probably go in this order.

1. A person gets tired of paying premiums and not seeing the benefit. Personally, I’m not all that anxious to use my insurance, but some people really do look at it that way.

2. A person buys a term policy and outlives the term insurance, and the need for the insurance, so they drop it. In this case the insurance did it’s job and is no longer needed.

3. Improperly sold universal life policies and whole life policies lapse because they run out of cash value to support them. I covered this sore point in a post yesterday.

Each time a policy lapses, the insurance company has collected money and not paid anything out. That pile grows and the company then has reserves sufficient to offer what seem to be inordinately low rates.

Bottom line. It’s really not a dirty little secret. Imagine what life insurance would cost if all policies paid a death claim. The good news is that the companies really will pay out a $500,000 benefit when you only paid $14 a month.

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• Don’t Forget The Gold Nuggets!
• Why Would A Life Insurance Policy Not Pay?

Entry Filed under: insurance, life insurance, term insurance, universal life, whole life