I’m thinking about getting life insurance because I have a mortgage and I have a young son and another baby on the way. And so if anything were to happen to me, I’d want them to at least be able to pay off the mortgage and then maybe have some money left over for college and to live, and whatever else. And so I went to the insurance company, and I said I want to get a $1 million policy. And what I’m actually getting a quote on is a term life policy, which is really– I just care about the next 20 years. After those 20 years, hopefully, I can pay off my mortgage. There’ll be money saved up. Hopefully, my kids would kind of at least have maybe gotten to college or I would have saved up enough money for college.
So that’s why I’m willing to do a term life policy. The other option is to do a whole life policy, where you could pay a certain amount per year for the rest of your life. At any point you die, you get the million dollars. In a term life, I’m only going to pay a $500 per year for the next 20 years. If at any point over those 20 years I die, my family gets a million. At the 21st year, I have to get a new policy.
And since I’m going to be older and I’d have a higher chance of dying at that point, then it’s probably going to be more expensive for me to get insurance. But I really am just worried about the next 20 years. What do they think that my odds of dying are over the next 20 years? So what I want to think about is the probability of Sal’s death in 20 years, based on what the people at the insurance company are telling me. Or at least, what’s the maximum probability of my death in order for them to make money? And the way to think about it, or one way to think about it, kind of a back-of-the-envelope way, is to think about what’s the total premiums they’re getting over the life of this policy divided by how much they’re insuring me for.
So they’re getting $500 times 20 years is equal to, that’s $10,000 over the life of this policy. And they are insuring me for $1 million. So they’re getting– let’s see those 0s cancel out, this 0 cancels out– they’re getting, over the life of the policy, $1 in premiums for every $100 in insurance. Or another way to think about it. Let’s say that there were 100 Sals, 100 34-year-olds looking to get 20-year term life insurance. And they insured all of them. So if you multiplied this times 100, they would get $100 in premiums. This is the case where you have 100 Sals, or 100 people who are pretty similar to me. 100 Sals. They would get $100 in premium. And the only way that they could make money is if, at most, one of those Sals– or really just break even– if, at most, 1 of those Sals were to die. So break even if only 1 Sal dies. I don’t like talking about this. It’s a little bit morbid. So one way to think about it, they’re getting $1 premium for $100 insurance. Or if they had 100 Sals, they would get $100 in premium, and the only way they would break even, if only 1 of those Sal dies.
So what they’re really saying is that the only way they can break even is if the probability of Sal dying in the next 20 years is less than or equal to 1 in 100. And this is an insurance company. They’re trying to make money. So they’re probably giving these numbers because they think the probability of me dying is a good– maybe it’s 1 in 200 or it’s 1 in 300.
Something lower, so that they can insure– one way to think about it– they could insure more Sals for every $100 in premium they have to pay out. But either way, it’s a back-of-the-envelope way of thinking about it. And it actually makes me feel a little bit better because 1 in 100 over the next 20 years isn’t too bad..