What Happens to my Life Insurance Premium?
It is industry standard across the big reinsurance companies to maintain an approximate 93% payout ratio. What this means is, for each $100 worth of annual life insurance premium received, they pay out $93 in death benefits to policyholders. Given they are dealing with literally billions of dollars at a time, it is almost unfathomable how they can reliably receive and pay out benefits with such accuracy.
However, they safely continue to do so year in and year out. On top of that, international competition drives the companies to continue to innovate and come up with new ways to refine their statistics and provide you more competitive (ie. lower) prices and features.
For instance, some companies are able to offer discounts to people who either attended graduate or postgraduate studies, or to those who earn a significantly high annual salary. The reason being simply due to the fact that people with masters or doctorate degrees, or substantially higher than average salaries, tend to live safer and healthier lives than the average person. These kinds of indicators can play to your favor and potentially reduce your insurance premium. The discounts are significantly visible in countries which are deemed “higher risk” for the average resident. Setting yourself apart with university degrees and high salary can help negate a potential country-wide higher mortality risk.
When all is said and done, the insurance and reinsurance industry is a 300+ year old competitive business operating at maximum efficiency. The overwhelming majority of annual premiums go towards paying out death benefits. So, what this also means is, for your low cost term insurance policy, if all goes according to plan and you actually (knock on wood) ever need to use it, the premiums paid are not really at a loss. In addition to buying you and your family 20 years peace of mind, most of your life insurance premium payments went to someone else’s family that was not so fortunate, and found themselves in need. That’s how it all works.
In this example the remaining $7 went to pay for the entire insurance operation. The buildings, the administrative staff, the lawyers, the marketing and customer support teams, and of course our friends the actuaries in the way-back office doing all the math and heavy statistics to calculate your premium levels which make all this possible.