Everyone knows that life insurance premiums
depend on age. The older you are the higher your premium. This is because the
moment you are born you start to die. So how do companies charge the premium
and still make money? Lots of people die and lots of them have policies: so how
do insurance companies make money (for the record: only smart companies make
money)? And why do different companies have different rates for the same
age? Let us reveal some secrets.
Good luck of many pays for the bad luck of few.
Insurance companies can predict how many
will die, not who will die. In theory only God can predict who will die. But
insurance companies can predict with remarkable accuracy that given a group of
individuals with similar profiles, how many will die. No magic here: they have
accumulated statistics from the 1700s. Yes, they have been collecting records
and data for 400 years, so you can expect them to be fairly accurate. So now it
is simple: collect premium from lots of people, set aside some money to pay
claims for the chaps who will kick the bucket, spend some on salaries and stuff
and retain the rest as profit. Seriously, it is as mundane as that.
Women live longer than Men.
Women are better than men; up to a point
that is. Women are better risks than men and insurance is probably the only
business where women are treated as better customers and charged less. Women
live longer than men provided they have the same opportunities in nutrition and
health and education, unless their lives are tragically ended due to cultural
shocks like burning them for dowry. Thus for the same age women will pay a
lower premium than men.
Accident and Mortality Rates Shoots up in the twenties
Age makes men foolish and insurance
companies know that. Women would argue that age has nothing to do with being
foolish as far as men are concerned. Neither are we are not talking about the
second childhood where some men behave as if they have to make up for the lost
years. As far as theory goes, and common sense supports this theory, a man who
is older will die earlier. But Insurance
companies are keen observers of human behaviour: their business depends on it.
Heard of the accident hump? In an otherwise predictable mortality curve, the
accident hump happens between the ages of 18 and 28 when boys discover
motorcycles (and girls). Premium rates will reflect the accident hump pretty
actively because death rates in these ages due to accident are fairly higher
than that of other ages.
Young Subsidize the Old
The younger you subsidises the older you.
Insurance companies are pioneers of the welfare system. Most of us are aware
that we are charged the same premium throughout our policy duration. This flies
in the face of logic that the older we are, the higher the premium we should be
paying. This happens because the insurance company levels the premium to
prevent your exiting the system in future. At the age of 50 you would be paying
5 times of what you would be paying at the age of 18. The chances of your exit
are higher if your premium keeps on rising. The insurance company charges an
appropriate discounting factor and levels your premium: till a certain age you
are actually paying more than what you should be paying based on your current
age and thereafter you will be paying a little less than what you should be
paying based on your current age.
Cheaper premiums do not mean better products.
Insurance companies have expenses, so in
theory every company’s premiums must reflect money set aside for claims, adding
of expenses and settling for a reasonable profit. Premiums vary on the fact
that some companies have fatter expenses, or may want a higher profit margin.
Some companies may keep aside more money for claims, because they have a worse
experience than other companies and are more prudent. None of this is very
transparent to an ordinary customer and as a customer we can do our due
diligence by logging on to a good Insurance comparison site and doing our
research. Check for how soon they pay claims and how many claims are paid as a
percentage of total claims. You may also check for customer service levels.
Immutable Need
Nobody can predict death. If you do not have term insurance, buy a term plan now. If you have already bought one, check if the amount of cover is
100 times your current monthly income. If there is a shortfall fill that up.
Before your next birthday, that is.
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