How do Life Insurance Companies Make Money?

  • Life Insurance

Life insurance seems like a pretty good deal. You pay $30 a month for 20 or 30 years and in the event of your death, your family gets a sizeable cash sum, often in excess of $250,000. Every 12 seconds someone dies in the United States and these deaths occur across all demographics (although the majority are over 70) and from a myriad of causes.

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If a life insurance company can afford to pay a $500,000 sum on a policy that’s collected less than $20,000, how can it afford to stay in business when life is so fragile, death is always a certainty, and they’re in it for the profit?

Contrary to what you might think, insurance companies don’t rely entirely on luck or underhanded tactics to stay in the black. There are actually three ways that an insurance company makes money and ensures those profits remain stable.

Underwriting

Underwriting is the process of taking a calculated financial risk in exchange for a fee. The word was coined as the underwriter, the “risk-taker”, would sign their name underneath a detailed outline of all risks they were willing to take.

Underwriting is performed by all life insurance companies and it’s a careful, considered process through which they can balance their profit and loss. There is no guarantee with the underwriting process and it’s not uncommon for them to lose money over the course of a financial year. However, what they lose one year may be offset by what they earn in another year.

How Insurance Companies Profit from Underwriting

Insurance is based on statistical analysis and probability. If you’re a healthy 20-year old with no preexisting medical conditions and no genetic issues, you’re considered to be very low risk. 

An insurance company may offer you a $500,000 payout on a 30-year term in exchange for a policy that costs less than $1,000 a year. They’re only making $30,000 over the term, but they know there’s a good chance you’ll live well beyond your 50th year, which means all of that $30,000 is profit.

In fact, statistically speaking, a 20-year old has a less than 6% chance of dying within 30 years and this applies to the general population. Once you account for medical issues, family health problems, smoking, drug use, dangerous jobs, and a plethora of other high-risk conditions, that figure drops to an infinitesimal sum.

The insurance company knows that if they have 50 healthy 20-year-olds on 30-year $500,000 policies, there’s a good chance that between 0 and 2 will collect. This means they will collect $1.5 million and payout between $0 and $1 million. 

The odds of a 20-year-old dying within that term increase if they have abused drugs/alcohol in the past, have a preexisting medical condition or their parents died of genetic disorders before they turned 50. In such cases, the underwriters will calculate the risks and create a policy that allows them to cover their costs.

By the same token, a life insurance company may refuse to provide a 30-year term to a 52-year-old, because according to the statistics, one out of every two will die within that term and they simply couldn’t offer realistic premiums.

Of course, these are just rough estimates, but it gives you a general idea of how life insurance companies operate. It’s also the reason why your premiums increase significantly if you are a smoker (smokers live 10 years less on average) are obese (obesity is considered to be as much of a mortality risk as smoking) or have a problematic medical history.

Canceled and Lapsed Coverage

Your life insurance policy can stop or be canceled at any time. Let’s return to the example of the 20-year-old paying premiums worth $1,000 a year. They may have taken out the life insurance policy because they just got married or they experienced a bout of paranoia after learning about a friend who died young.

But what happens when that relationship ends and that paranoia fades away; what happens if they go from being comfortably employed, to unemployed and desperate? They’re not the ones who will benefit from that payout, so they may decide that they’re just wasting their money, in which case they stop making the payments and the policy lapses. If this happens, the life insurance company gets all of the premiums and none of the liability.

Whole life insurance policies can also be cashed out. They build money through dividends and this entices the owner to give it all up for a big payday. If they’re struggling financially and realize they have a big balance waiting for them on their life insurance policy, they may be tempted to cash the check, close the account, and walk away with the windfall, thus removing all liability from the insurance company.

Refusing to Pay Out

Life insurance companies can also make money by refusing to pay out and pointing to a discrepancy. This is not part of their business strategy, and they don’t actively seek to scam their customers because, quite simply, they don’t need to. Thanks to underwriting, cash outs, lapse policies and investing, life insurance is a profitable enterprise without needing to resort to underhanded tactics.

However, they can and will refuse payouts if they determine that the contract was somehow breached. This can happen in any number of ways and for a myriad of reasons:

The Cause of Death Wasn’t Covered

Most causes of death are covered by most life insurance policies. However, there are some exceptions, including suicide. Many policies refuse to cover suicide at all, while others refuse to cover it if it occurs within the first 2 years of the policy.

More than 40,000 people take their own lives every year in the United States and it’s a common issue across all demographics. It’s also on the increase and is now the 10th biggest killer in the United States. 

As heartless as it might seem for an insurance company to refuse a payout for someone who took their own life, it’s important to remember that their underwriting is based purely on probability, and because suicide is one of the biggest killers in young men, it’s something that has to be considered.

The policy should state clearly which causes of death are covered and which ones are not. It’s also something you can discuss with the insurance company when you take out your policy.

Important Information was Not Disclosed

This is the most common reason for a payout to be refused. In some cases, the applicant is looking for cheaper premiums and knows that a few seemingly innocent lies will shave tens of dollars off their premiums. 

The policyholder may also assume that certain information isn’t relevant or be too ashamed to disclose it. For instance, if they were cautioned for driving under the influence of drugs or alcohol it may not seem relevant to the underwriting process, but if they die in a road traffic accident it could prevent a payout.

In the majority of cases, however, they simply forget. A life insurance policy is something you fill out in one sitting and something that requires you to list all previous medical conditions, hospital visits, and health complaints. It’s easy to forget a few things here and there.

There is No Beneficiary

A life insurance policy can only be paid directly to an heir when they are named as a beneficiary. If there is no beneficiary, it will be paid to the policyholder’s estate, from which their heirs can make their claim.

This becomes problematic if the policyholder has a lot of debt, as the debtors will then line up to take their share from the estate. It can also make life difficult for loved ones trying to make a claim on that estate. It’s always recommended, therefore, to name beneficiaries on the life insurance policy and to back this up by writing a will.

The Contestability Period

The above issues become more prevalent during something known as the contestability period. This begins as soon as the policy goes into effect and it can last for 1 or 2 years, depending on the policyholder’s state of residence.

If the policyholder dies during this period, the life insurance company will seek to contest it by looking at all of the details and ensuring they match. They will check the cause of death against previously filed medical reports and will make sure the correct information was supplied at the time the policy was filed and that there are no discrepancies.

Once this period passes, it’s unlikely there will be any issues, but they can still occur. The insurance company may, for instance, investigate the claim if they believe it was purchased for the sole benefit of the beneficiaries (for example, the policyholder purchases it knowing they were going to commit suicide or were about to die).

Summary: Payouts are Rare

Studies suggest that as few as 2% of all term policies pay out, and the most common reason for non-payment is that the policyholder survives the term. This is a statistic that detractors like to quote and it’s often followed by a claim that life insurance is just institutionalized gambling. 

To an extent, they’re right. You’re essentially gambling against a house that always wins and, like a casino, it always wins because, for every player that wins, 10 others will lose. The difference is that life insurance provides some much-needed peace of mind while you’re alive and ensures your loved ones are covered in the event that anything happens to you.

Source: pocketyourdollars.com

7 Things Renters Insurance Does NOT Cover | ApartmentSearch

Woman sitting with phone and laptopBanking on your renters insurance to cover you in case anything happens to your apartment? Don’t! While you’ve probably given thought to what is covered under your renters insurance, it’s equally important to ask, “What does renters insurance not cover?” Learn which items are excluded from most renters insurance policies, so you can better protect your stuff and your wallet.

1. Losses from (certain) natural disasters

Oddly enough, renters insurance covers some natural disasters, but not others—so it’s essential you consider which ones you’re at risk for in your area.

Generally, renters insurance won’t cover flooding, earthquakes, or sinkholes, so if you’re in an area that’s susceptible to any of those things, it’s advisable to look into getting separate coverage for that. On the other hand, renters insurance does typically cover tornados, wildfires, and volcanic eruptions, but it’s always best to double-check with your provider if you live in an area that’s prone to these weather events.

2. Pricier items

It’s important to scope out the details on your policy when it comes to your most expensive belongings since many insurers will cap their coverage to a specific price point per item. For example, electronic items valued over $2,500 and jewelry over $1,500 are typically excluded from renters insurance plans. If you’ve got expensive possessions in your rental unit, it’s wise to purchase additional coverage.

3. Things you (or your pet!) accidentally break or ruin

Just because your renters insurance covers something doesn’t mean that they’ll replace it in any scenario. Let’s say you have a nice rug in your living room. If a thief breaks in and steals it, it’s covered. If it gets destroyed in a fire, it’s (generally) covered. If your pet pees on it or you drop a plate of spaghetti, it’s not covered. In other words, being careful and tidy is your responsibility!

4. Items you haven’t correctly documented

Getting your insurance to cover specific items without a proof of ownership or proof of value can be difficult. For example, if your bike gets stolen out of your apartment balcony, but you have no way of proving you owned that bike in the first place—your insurer might be apprehensive about replacing it!

When your property has been damaged or stolen, the last thing you want to spend your time doing is fighting with your insurance company. To avoid any potential issues, get into the habit of saving your receipts, and photographing your items. If anything winds up happening, the more documentation you have, the better.

5. Belongings damaged by pests

Finding out you’re sharing your space with mice, termites, or other creepy-crawlies is bad enough! But what’s worse is discovering that your renters insurance doesn’t protect you from the liability of pest-related damage.

In the case of pests, the best thing you can do is to take proper precautions against any sort of infestation, like keeping your kitchen clean, throwing away clutter, and sealing potential entry points.

6. Your roommate’s stuff

Unless your roommate is your legal relative or spouse, your renters insurance policy will not cover them if something happens. It’s crucial that if you’re living with roommates, you advise them to invest in their own coverage. Otherwise, if they find themselves in a pickle, you’ll be forced to say, “I told you so.”

7. Your car

You scraped against a pole in your apartment complex’s parking garage, and now you’re left wondering, “Does renters insurance cover car damage?” Or maybe something even worse has happened, that’s left you questioning, “Does renters insurance cover car theft?”

Many renters have the false belief that if their car is damaged or stolen within the limits of their rental property, it’s covered by their renters insurance. Unfortunately, that’s not the case. While renters insurance covers your items inside your vehicle, it doesn’t cover your actual vehicle—that’s what comprehensive car insurance does!

Even though renters insurance isn’t legally required, it’s one of the smartest decisions a renter can make, according to Intuit’s Mint. However, it’s essential to understand what exactly applies, and which items will need additional coverage.

Does your renters insurance policy leave a dent in your wallet? Help your bank account recover by finding an apartment with cheaper rent.

Source: blog.apartmentsearch.com

What Causes of Death are not Covered by Life Insurance?

  • Life Insurance

The death of a loved one is hard to take and while a life insurance payout can ease the burden and allow you to continue leaving comfortably, it won’t take the grief or the heartbreak away. What’s more, if that life insurance policy refuses to payout, it can make the situation even worse, adding more stress, anxiety, anger, and frustration to an already emotional period.

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But why would a life insurance claim be refused; what are the causes of death that may cause your life insurance coverage to become null and void? If you or a loved one has a life policy, this article could provide some essential information as we look at the reasons a death claim may be refused.

What Causes of Death are Not Covered?

The extent of your life insurance coverage will depend on your specific policy and this is something you should check when filing your life insurance application. Speak with your insurance agent, ask questions, and always do your due diligence so that you know what you’re buying into and what sort of deaths it will provide cover for.

Life insurance policies have something known as a contestability period, which typically lasts for 1 to 2 years and begins as soon as the policy starts. If the policyholder dies during this time, they will investigate and contest the death. 

This is generally true whether her you die of a heart attack, cancer or suicide. However, if this period has passed, they may only contest the death if it results from one of the following.

Suicide

Suicide is a contentious issue where life insurance is concerned. On the one hand, it’s a very serious issue and one that’s often the result of mental health problems, so there are those who believe it is deserving of the same respect as any other illness. 

On the other hand, the life insurance companies are concerned that allowing such coverage will encourage desperate people to kill themselves so their loved ones will be financially secure.

It’s a touchy subject, and that’s why many companies refuse to go anywhere near it. Some will outright refuse to pay out for suicide, but the majority have a suicide clause, whereby they only payout if the death occurs after a specific period of time.

If it occurs before this time, they may return the premiums or pay nothing at all. And if they have reason to believe that the policyholder took their own life just for financial gain, they will almost certainly investigate and may refuse to pay.

Dangerous Hobbies and Driving

If you die in a car accident and it is deemed that you were driving drunk, your policy may not payout. Car accident deaths are common, and this is a cause of death that policies do generally cover, but only when you weren’t doing something illegal or driving recklessly.

Deaths from extreme activities like bungee jumping or skydiving may be questioned, especially if these hobbies were not reported during the application. 

Illegal Acts

Your claim can be denied if you are committing an illegal act at the time of your death. This can include everything from being chased by the police to trespassing. A benefit may also be refused if you die for an intentional drug overdose using non-prescription drugs. 

Smoking or Pre-existing Health Issue

Honesty is key, and if you lie during the application or “forget” to tell them about your smoking status or pre-existing medical conditions, they may refuse to payout. It doesn’t matter if they performed a medical exam or not; the onus is not on them to spot your lie, it’s on you not to tell it in the first place.

This is one of the most common reasons for an insurance contract to be declared void, as applicants go in search of the cheapest premiums they can get and do everything they can to bring those costs down. They may also believe they will get away with their lies, either because they will give up smoking in a few months or years or because they will die from something other than their preexisting condition.

But lying in this manner is risky. You have to ask yourself whether it’s worth paying $100 a month for a valid policy that will payout without issue or $50 for a policy that will likely be refused and will cause endless stress for your beneficiaries.

War

Life insurance benefits generally don’t extend to the battlefield. If you’re a solider on the front line, your risk of death increases significantly, and many insurance policies won’t cover you for this. This is true even if you’re not in active duty at the time you take out the policy. More importantly, it also applies to correspondents and journalists.

You don’t invalidate your policy by going to a war-torn country and reporting, but if you die resulting from that trip, your policy will not payout.

Dismemberment

Your life insurance policy likely won’t pay for dismemberment or critical illness, but there are additional policies and add-ons that will provide cover. You can get these alongside permanent life insurance and term life insurance to provide you with more cover and peace of mind. 

They will come at a significant extra cost, but unlike traditional life insurance, they will payout when you are still alive and may make life easier after experiencing a tragic accident or serious illness.

We recommend focusing on getting life insurance first, securing the amount of coverage you need from a permanent or term life policy, and only then seeing if there is room in your budget for these additional options.

How Often Do Life Insurance Policies Payout?

We have recommended life insurance many times at PocketYourDollars and will continue to do so. We often state that it is essential if you have dependents and want to ensure they’re cared for when you die. But as much as we recommend it and as simple as the process of applying often is, there is one simple fact that we often overlook:

Life insurance companies rarely payout.

It’s a stat you may have seen elsewhere and it’s 100% true. However, contrary to what you might have heard or assumed; this is not the result of a refusal to pay the death benefit when the policyholder passes away. Sure, this accounts for some of those non-payments, but for the most part, it’s down to one of the following:

The Policyholder Survives the Term

The majority of life insurance policies are set to fixed terms, such as 10, 20 or 30 years. If anything happens during this period of time, your loved ones collect your death benefit, but if you survive, the policy ends, no money is paid out, and if you want another policy you will need to pay a larger sum.

The Policyholder Accepts the Cash Value

Whole life insurance policies are like investments crossed with life insurance. Your loved ones get a death benefit if you die, but it also accrues interest and can be cashed out. When this happens, the insurer collects, you get a sum of money, and it feels like a win-win, but in reality, the insurer has just dodged a bullet.

The Policyholder Stops Making Payments

As soon as you stop making your premium payments, you lose cover and you run the risk of your policy being canceled. This is true for pretty much any type of policy and it happens regardless of the policy term. 

Unlike a credit card company, which may chase you for payments, a life insurance company will place the burden of responsibility on you. After all, a creditor loses money when you don’t pay, whereas a life insurance company comes out on top.

This often happens when individuals take out substantial life insurance policies at a young age, only to suffer drastically changing circumstances. Imagine, for instance, that you’re 20-years-old and you buy a house with your spouse-to-be, with a view to settling down and starting a family. You assume that you’ll need it for a long time, so you take out a 30-year-term.

But 10 years down the line, your spouse leaves you, the family you wanted didn’t happen, and you’re all alone with no dependents, and with growing debts, bills, and obligations. At that point, life insurance becomes a burden, so you may stop making payments, thus allowing the insurance company to profit from 10 years of insurance premiums.

Summary: It’s Not That Cut-Throat

You don’t have to look far to find consumers who feel they have been wronged by life insurance companies, consumers who will expend a great deal of time and effort into calling out these companies for their perceived wrongdoings. But they often exaggerate the situation due to their extreme anger and this creates unrealistic anxieties and expectations.

The truth is, while there are people who have been genuinely wronged, they are in the extreme minority. The vast majority of family members who were refused a death benefit were let down by the policyholder and by the lies they told on their policy.

Policyholders lie about their weight, smoking status, and medical conditions, and when caught up in this lie, they often claim they made an honest mistake. But the truth is, most life insurance companies will overlook simple mistakes and only really care when it’s obvious that the policyholder lied. 

And let’s be honest, it doesn’t matter how forgetful you are, you’re not going to forget that you’re a chain smoker, alcoholic, drug user, extreme sports fan or that you recently had a medical crisis!

If the policy was filed honestly, you shouldn’t have an issue when you collect, even if it’s still in the contestability period. As discussed above, life insurance companies stack the dice in their favor. They use statistics and probability to carefully set the premiums and benefits, and they rely on policyholders forgetting to pay and outliving the term. They don’t need to “rob” you in order to make a profit. So, be honest when applying and you won’t have anything to fear.

Source: pocketyourdollars.com

10 Fire Safety Tips for Apartment Renters

Apartment fire alarm with read blinking light and smokeApartment life offers many conveniences. But there are also some risks involved. For example, you can’t control what the person in the apartment next door does, even though you both share a wall, a roof, etc. That proximity and shared space mean it’s even more important to avoid apartment fires by practicing fire safety.

Here are 10 crucial tips:

1. Make Some Noise

Noise can be a very helpful part of your apartment fire safety plan. We’re talking about two kinds of apartment noise here:

  • The kind of noise your smoke alarm makes when you test it at least once per month.
  • The kind of noise you’ll make when you speak with your building manager about obstructed exits, fire doors being propped open, and safety violations of all kinds.

2. Map Your Moves

Learn the locations of the nearest exits and fire extinguishers in your apartment building. Don’t stop there, though. Once out of the burning building, you’ll need to stay away so as not to create more congestion around the area while firefighters battle the blaze. Make sure you pinpoint that area on your map.

3. Boost Your Memory

Studies have shown that physically rehearsing something can help your body retain important — or even life-saving — information about how to move. This is what is referred to as your muscle memory. Muscle memory is especially beneficial in high-stress situations where you might otherwise be flustered.

4. Be a Team Player, Not a Hero

Real danger can bring out the best in us. But that doesn’t mean you should risk your life because you want to make sure one of your neighbors has escaped. Immediately notify the nearest firefighter once you are outside. Trying to rescue others may only create a larger problem for the firefighters.

5. Clear the Way!

Moving swiftly through a smoke-filled apartment or hallway is not the best time to be darting around your computer bag, the recycling you didn’t take out, and that stack of library books you need to return. Keep your apartment floor and hallways clear of clutter to eliminate all potential hurdles between you and safety.

6. An Ounce of Prevention …

Ordinarily, it’s safe to say that an ounce of prevention is worth a pound of cure. Which is to say that making sure something bad doesn’t happen is better than recovering from it. When an apartment fire is the topic, though, an ounce of prevention is worth much more than a pound of cure. For instance, do not leave frying foods unattended in the kitchen. Or if you smoke, ensure every cigarette butt is fully extinguished when you’re finished.

7. Shut It

Before you go to sleep, shut your bedroom door. Doing so can help minimize damage or physical harm from the fire itself or smoke inhalation. You only have about three minutes — or less — to escape a residential fire. Every second counts. If you can buy yourself even one extra second by closing your door, it sounds like a good idea! And if you wake up to a fire alarm or blaring smoke detector, don’t freak! Here are additional apartment safety tips for you and your family.

8. Fake It

Some apartment buildings ban open flames of any kind, which means candles are a no-no from the start. Some people ignore such rules, though, which can have devastating consequences. If YOU love the ambiance of a flickering candle, pick up the more convenient and far safer electric version. After all, an apartment on fire is a high price to pay for setting a mood.

9. Put Your Name on a List

Does a disability prevent you from making a swift escape? Ask your landlord or building manager if your name and apartment number can be placed on a list in the fire alarm panel or other location that’s secure but readily accessible by the fire department.

10. Be Neighborly

If your apartment building prohibits grilling under covered patios, walkways, or balconies, obey those rules. And make sure all exits are cleared of debris that could hinder escape or support. If you see any violations of such apartment fire safety precautions, refer back to #1 on this list and make some noise — to your landlord or building management company.

If being neighborly and alerting responsible parties aren’t enough to set your mind at ease, or if you’re looking to upgrade to a more modern apartment complex, it’s time to search apartments on ApartmentSearch.com. The process is easy and rewarding. After you sign your lease, let us know and we’ll hook you up with a $200 reward!

Source: blog.apartmentsearch.com