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Current time:0:00Total duration:4:22

Term life insurance and death probability

Video transcript

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 and 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 and whatever else and so I went to the insurance companies I said I want to get them 1 million dollar policy and I what I'm actually getting a quote on is a term life policy which is really I just care about the next 20 years after those 20 years hopefully I can pay off my mortgage and it'll be money saved up and hopefully my kids would kind of at least have maybe gotten to college or I would have had saved up enough money for college so that's why I'm willing to do a term life policy the other option is to do a whole life policy where you could pay a certain amount of per year for the rest of your life and at any point you die you get you get the million dollars in a term life I'm only going to pay $500 per year for the next 20 years if at any point over those 20 years I die my family gets a million at the 21st year I have to get a new policy and since I'm going to be older and I'd have a higher chance of dying at that point then it's probably going to be more expensive for me to get insurance but I really am just worried about the next 20 years but what I want to do in this video is think about given 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 so what I want to think about is the probability of Sal's death in 20 years based on based on what the people at the insurance company are telling me or at least what is what's the maximum probability of my death in order for them to make money and the way to think about it or one way to think about it kind of a back-of-the-envelope way is to think about what's the total premiums they're getting over the life of this policy divided by how much they're insuring me for so they're getting $500 $500 times 20 years is equal to that's $10,000 over the life of this policy and they are insuring me they're insuring me for 1 million dollars they are insuring me for $1,000,000 so they're getting let's see those zeros cancel out this zero cancels out they're getting over the life of the policy $1.00 in premiums $1.00 in premiums for every there's only for every $100 for every $100 in insurance or another way to think about it let's say that there were a hundred cells 134 year-olds looking to get 20-year term life insurance and they insured all of them so if you multiply this times 100 if you multiply this by a hundred you they would get a hundred dollars in premiums 100 dollars in premiums this is the case where you have a hundred cells or hundred people who are pretty similar to me one hundred one hundred cells they would get a hundred dollars in premium and the only way that they could make money the only way they could make money is if at most one of those cells or really just break even if at most one of those cells were to die so break even break even if only only one cell dies I don't like talking about this it's a little bit morbid so one way to think about they're getting $1 in premium for $100 insurance or if they had a hundred thousand so we've got a hundred dollars in premium and the only way they would break even if only one of those cell dies so what they're really saying is is that the only way they can break even is if the probability of Sal dying and then look next 20 years is less than is or is less than or equal to one in 100 and this is an insurance company they're trying to make money so they're probably giving these numbers because they think the probability of me dying is a good maybe it's one in 200 or it's one in 300 something lower so that they can ensure a yook one way to think about they could insure more cells and have and have an end for every hundred dollars in premium they have to pay out but either way it's a back-of-the-envelope way of thinking about it and it actually makes me feel a little bit better because one in a hundred over the next 20 years isn't isn't too bad