### How does Term Insurance worK? Is there a catch?

POSTED BY ON August 1, 2011 2:13 pm COMMENTS (5)

I am 34yrs of old and I have got term insurance for 50Laks covered till my 70yrs of age.  I pay a premium of 9200pa.  Thus in effect, I endup paying only 3,31,200 for my entire tenure.  Thus in total, the company has to collect amount from 15 people of my age for the same premiums so that the total policy amount can be covered.(50 lakhs/3,31,200)=~15.

I am curious to know, in a group of 15, who have been covered for the same amount and aged almost the same, how would the company pay the sum assured, when there are 2 deaths(for the entire tenure)?  Note, essentially, they would have taken approx. 49.5 Lakhs from policy holders and they would have to pay 1Crore.  Wouldn’t the company be in loss?

Please clarify.

Thanks
Sunil Kumar

## 5 replies on this article “How does Term Insurance worK? Is there a catch?”

1. Sunil

regarding your comment “70 yrs” … All I will say is that all thing is taken care in calcualations and premiums have all that considered .

So Insurnace company has well thought all this before asking for premiums ..

Manish

2. Ramesh says:

Left expectancy is considered to be mean life expected at time = 0 years. So, 64.1 years is average expectation for a new born. Check out the values at 34 years, it will be different (and more than a total of 64.1). That is what the actuary tables are there for.

Reverse the question, if none of the 15 people die, the company will be having the premiums as complete profit.

3. Sunil Kumar says:

However, in my example the insurance is till 70yrs of my age. In such case, I believe, the mortality rate will more than 95%, since life expectancy in India is about 64.1yrs. Given the circumstance, how will the insurance company pay the 95% of insurance holders?

Thanks
Sunil Kumar

4. Sunil

they way you are thinking is correct , but the numbers are not correct , Insurance is a business of probabilities and based on past data and some advanced projections and calculations (done by Acturial people and not in the scope of discussion here) . So lets take a bigger picture .. .

As far as I know the mortality rates are around 2-3% in age group of 25-40 . So it means out of every 100 people who are insured, 2 people die on an average , this can be 3 at times .. 4 some times and 1 or 0 also .. apart from that , its not exactly 2 out of 100 , but 20000 out of 1000000 , so the yearly deviations can be still within a range .

So now based on the worst cases , they can decide the premiums .. in a year .. as projected there will be death’s in a range and they all will be paid .. Premiums are generally collected in a way that mostly it does not hurt companies in longer run , In a particular year or so , there might be more payments than collections , but remember , these companies are here for decades and they are looking for long term profits .. so over long term , they will make money ..

I hope you got the point . Its like how you will run a insurance business if you had to plan for it ?

Manish

1. Ajay says:

Manish – Just to add. The insurance companies themselves get reinsured through other companies to transfer the risk of being at loss in worst-case scenarios

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