Term Life Insurance and Death Probability Understanding an insurance company's sense of my chances of dying.
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- I'm thinking about getting a life insurance
- because I have a mortgage,
- and I have a young son and another baby on the way.
- So if anything were to happen to me
- I want them to at least be able to
- pay off the mortgage,
- and then maybe have some money left over for college
- and to live and whatever else.
- and so I went to the insurance company
- and said that I want to get a 1 million dollar policy.
- I am actually getting a term life policy.
- I just care about the next 20 years,
- after those 20 years,
- hopefully I can pay off my mortgage
- and have money saved up,
- and hopefully my kids would have at least gotten to college
- or I have saved up enough for college.
- That's why I'm doing term life policy.
- Other option is to do whole life policy
- where you can pay a certain amount per year
- for the rest of your life,
- at any point you die,
- you get the million dollars.
- At term life I pay 500 dollars per year for 20 years
- If any point over those 20 years I die,
- my family gets a million.
- At the 21st year I have to get a new policy,
- because I' m older and have a higher chance of dying in that point.
- then it is probably going to be more expensive
- for me to get an insurance.
- But I am really just worried about next 20 years.
- But what I want to do in this video is to think about
- giving to these numbers
- that have been quoted to me by the insurance company
- what do they think that my odds of dying are
- over the next 20 years.
- I want to think of the probabilty
- of Sal's death in 20 years
- based on what the people in insurance company are telling me
- or at least what's the maximum probability of my death
- in order for them to make money.
- The one way to think about it is to think about
- what's the total premiums they're getting
- over the life of this policy
- divided by how much they are insuring me for.
- So they are getting 500 dollars times 20 years
- is equal to 10 000 dollars
- over the life of this policy.
- They are insuring me for 1 million dollars.
- So they're getting,
- let's see those zeros cancel out, this zero cancels out,
- they're getting,
- over the life of the policy,
- 1 dollar in premiums
- for every 100 dollars in insurance.
- Or another way to think about it is,
- let's say that there were 100 Sals
- a hundred 34-year-olds,
- looking for 20 year term life insurance
- and they insured all of them.
- If you multiply this by a 100
- you would get 100 dollars in premiums.
- This is the case where you have 100 Sals,
- 100 people who are pretty similar to me,
- 100 Sals.
- They will get 100 dollars in premium.
- The only way they could make money is if
- at most one of those Sals were to die.
- Break even if only one Sal dies.
- I don't like talking about this. It's a little bit morbid.
- So one way to think is
- they get 1 dollar in premium for 100 dollars insurance
- or if they had 100 Sals
- they get 100 dollars in premium
- and the only way they would break even
- is if only one of those Sal's dies.
- So what they're really saying is that
- the only way they can break even
- is if the probability of Sal dying in the next 20 years
- is less than or equal to 1/100.
- And this is an insurance company,
- they're trying to make money.
- So they are probably giving these numbers
- because they think that
- the probablity of me dying is good,
- maybe is 1/200, or is 1/300,
- something lower,
- so that they could insure more Sals
- for every 100 dollar premium they have to pay up.
- But either way
- it is the back of the envelope of thinking about it.
- It actually makes me feel a little bit better
- because 1/100 over the next 20 years isn't too bad.
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