How do they make money? Am I being dim?

michaeljones161

I just look out "YourLife Plan Term Assurance" with AIG. It's for 26 years and I pay £30.02 per month. that means I pay them £9,366.24 in total. I am covered for £20,000.
I am 63 and am extremely likely to die in the next 26 years (ie before I'm 89).
I know I lose the £9,366 if I live longer, but I don't expect to. How do they make money from this? Is there some way they can get out of paying up? It doesn't seem to make sense from their end. Are they really gambling on my living to nearly 90?
I asked an AIG adviser on the phone about this and she just basically said they have so many clients, they can do this.
I was worried I wasn't properly covered so I rang to check that I'm covered for accidental death and dying from plain old age - and apparently, I am. (The cover says they "will pay the benefit if any of the persons covered die or are diagnosed with a terminal illness". I wanted to check whether I was only covered if I died of a terminal illness - but, no - it's if I die - of anything. Accidental , natural or otherwise.)
Anyway, it all seems too good to be true - especially compared to my wife's 'Over 50's, no medical required' cover which pays out a lot less - though that is to death.
-
Also, I didn't have to sign any papers - not even the direct debit. It was all done on the phone and by email. Is that normal?  Am I just being old fashioned? (I work in a bank and we need signatures for pretty much anything.)
-
Any thoughts?

davidmcn

You're more likely to die closer to the end of the 26 years (or after it ends) than in the early years of the policy, in which case inflation will mean the £20,000 is likely to be worth much less than it is today, plus they can use the premiums from all the policyholders who survive beyond the term of their policies.

Birseh_

ok....so...lets say YOU set aside £30.02 per month and you invest it in the stock market or a portfolio. Every £30 then earns an interest rate or a return on capital - let's say the long-run average 7%. So at the end of the first month you will have 30.02*(1+0.57%)...assuming the long run average is achieved. Why 0.57%? Because converting 7% annual into a monthly rate it is 0.57% per month because (1+0.0057)^12 = 7%
At the end of the first month you have £30.18 which grew at 0.57% from £30.02 to which you then add £30.02 and you then get a 0.57% return on the combined amount.....the same again next month. You add £30 and compound......
If you did this for 26 years you would have £26,448. Turning this on its head AIG assume a rate of return and assuming eh law of large numbers they get a mean return and profit from a mean death rate per age group. 

As you can see.....its just a question of laws of average and the laws of large numbers and an expected rate of return

dunstonh

I am 63 and am extremely likely to die in the next 26 years (ie before I'm 89).

Actually, statistically, a 63 year old male in good health will has a 75% chance of making 86 and a 50% chance of making 92.

How do they make money from this?

Statistically, over half of policyholders will be expected to live beyond age 84.   So, after 20 years, inflation would have turned the monetary value of £9300 into £4100 in spending power today.   

Is there some way they can get out of paying up?

If you have lied to them about your health.

Are they really gambling on my living to nearly 90?

Statistically, it does not seem much of a gamble if you are in clean health.   

Anyway, it all seems too good to be true - especially compared to my wife's 'Over 50's, no medical required' cover which pays out a lot less - though that is to death.

Over 50s plans are an option of last resort generally bought by people in poor health or dont realise they are buying something of poor value.   If you are in good health, then underwritten life assurance would be expected to be much better value.

Also, I didn't have to sign any papers - not even the direct debit. It was all done on the phone and by email. Is that normal? 

yes

Am I just being old fashioned? (I work in a bank and we need signatures for pretty much anything.)

Banks are generally old fashioned running out-of-date systems and have to cater for the lowest common denominator user.

forgotmyname

FIL had an over 50's plan and he paid in almost double.  That is where they get their money.

Choice of stop paying and get nothing or keep paying and get something. Depends when you have that
lightbulb moment that your going to get back less than you paid in.

Sandtree

michaeljones161 said:

 Am I just being old fashioned? (I work in a bank and we need signatures for pretty much anything.)

I'd be willing to take a guess at which bank you may work for but the majority of banks don't need wet signatures any more... sign up online for new accounts etc, you can the set up internet and telephone banking and can do almost everything else over the phone etc.

As to the main question, as has been explained they calculate longevity/mortality/morbidity (as appropriate), add in expected investment returns, adjust for admin costs, cost of capital and profit margin and that gives a premium. Obviously mistakes can happen... not many considered Covid19... however this is why insurers have to hold capital above and beyond the best estimate of liability.  It does seem a particularly low premium unless you have inside knowledge that theres another pandemic on the horizon.

Old_Lifer

Life assurance is a long term business.

In setting the premium tables for each class of business , the actuary  will be able to draw on mortality  statistics  going way back and will take into account  more recent trends in mortality.    All of this means the Life Office will have a fairly good idea of how many policyholders at any given age are likely to die each year in each policy class.

Because of  this,   after deducting operating expenses   the Life Office  is able  to invest  the bulk of the premiums long term and it is then that over long periods  the magic of compound interest comes into play.  

Over 50's plans , with no medical questions asked and  aimed at those in the latter part of life, often in poor health ,  are expensive and complaints about the policies often feature of the Forum with the result that many believe, wrongly, that life policies seldom pay-out more than is paid in premiums.      In reality,  a fully underwritten life policy with medical questions asked  can  return far more than the premiums paid.      I took-out a with profits whole life policy in my 20's  and as I no longer needed life assurance I surrendered  it in my mid-60's.  The surrender value I received was around  eight and a half times the total premiums I had paid under the policy

Aretnap

Several reasons.

First, as others have noted, you're not just giving them £30.02 per month. You're also giving them the interest you could have got by putting that £30.02 in the bank (not much at current interest rates, admittedly) or the returns you could have got investing it in property or the stock market (considerable, especially over 20+ years).

Secondly, most people under-estimate their life expectancy. From a quick Google the average life expectancy of a 63 year old man is 20 years, however that average includes all the 63 year olds who have smoked all their lives, all the 63 year olds who are obese, all the diabetic 63 year olds and all the 63 year olds with heart problems. If you don't fit into any of those categories then your life expectancy will be considerably better than 20 years and you will have a pretty good chance of making it past 89.

(If you do fit into one of those categories the insurer will have adjusted the premium to account for your higher risk of dying - and if you didn't tell them about a known serious illness that's pretty much the only way they could refuse to pay out).

And thirdly some people will stop paying the premiums and cancel the policy at some point (either because they can't afford the premiums or because they no longer need the policy, no longer having any dependants/heirs) - which means that the insurer would keep the premiums already paid and would not have to pay out on death.