28 February 2014 0 Comments

Life Insurance Company Secrets

shutterstock_117945238Well, it’s not really a secret, but there are a couple of ways that life insurance companies improve their bottom line…and they do it at the expense of policyholders.  That sounds bad, but not really as long as you know how to avoid unintentionally contributing to their coffers.

All life insurance companies price their policies so that the premiums collected, plus the interest they earn exceeds their total claims and cost of doing business.  But, company profits are enhanced by policyholders who do not die and do not keep their policies in force to the end of the duration for which they originally planned.

If you purchase a 20 year term policy, keep it through the 20th year and then discontinue it, the insurance company should have made a profit taking into account those that died during the 20 years.  But they will make much more profit from those 20 year term policies that were dropped by the insured between the 8th and 12th years. By the 8th year the insurance company has recovered much more than their acquisition costs (commissions and cost of underwriting) and before the 12th year most people’s health will not have deteriorated to the point where they know they must keep the policy in force.

Insurance companies also get a bonus when term insurance policy owners live to the end of their original term, are still in good health and keep paying the greatly escalated term premiums for an additional year or two, just because they failed to take any affirmative action to do anything else.

Of course, the companies also make additional profit when permanent life insurance is discontinued after it has been in force for 8 years, but years prior to death.  I covered that mistake in my previous entry.

So, how can you avoid any excessive contribution to insurance company profits?  Purchase policies whose duration matches the anticipate time for which coverage will be needed.  Like the wise old insurance agent once said. “Tell me when you’re going to die and I’ll tell you what kind of policy to buy.”  But seriously folks, find an agent that will assist you in laddering various policies to coincide with your long term goals and then review your plan as your needs change.

Coming up…what underwriters learn about you from your lab results.

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