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View Full Version : How does Term Insurance worK? Is there a catch?



msgforsunil
01-08-2011, 01:37 PM
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

Rahul
02-08-2011, 12:20 AM
Life insurance, like other forms of insurance, is based on three concepts:
1- Pooling many exposures into a group,
2- Accumulating a fund through contributions (premiums) from the members of the group, and
3- Paying from this fund for the losses of those who die each year.
That is, life insurance involves the group sharing of individual losses. The individual transfers the risk of dying to the pool by paying the premiums. To set premium rates, the insurer must be able to calculate the probability of death at various ages among its insureds, based on pooling.

Example - If an insurer promises to pay 100,000 at the death of each insured who dies during the year, it must collect enough money to pay the claims. If past experience indicates that 0.1 percent of a group of young people will die during the year, one death may be expected for every 1,000 persons in the group. If a group of 300,000 is insured, 300 claims (300,000 × .001) are expected. Because each contract is for 100,000, the total expected amount of death claims is 30 million (300 claims × 100,000). To collect enough premiums to cover mortality costs (the cost of claims), the insurer must collect 100 per policyholder (30 million in claims / 300,000 policyholders).

Rahul
02-08-2011, 12:22 AM
Other Premium Elements
In addition to covering mortality costs, a life insurance premium must reflect several adjustments. First, the premium is reduced to recognize that the insurer expects to earn investment income on premiums paid in advance. In this manner, most of an insurer’s investment income benefits consumers. Second, the premium is increased to cover the insurer’s marketing and administrative expenses. Taxes levied on the insurer must also be recovered. In calculating premiums, an actuary usually increases the premium to cover the insurer’s risk and expected profits. Risk charges cover any deviations above the predicted level of losses and expenses. The major premium elements for term life insurance and the actual prediction of deaths and the estimation of other premium elements are complicated actuarial processes.

Hope it clears your doubts .