Life Insurance Advice From a Life Actuary

Life insurance tends to be one of those things that you know may be good for you, but is so easy to put off. For one, it makes you confront something uncomfortable: possibly untimely death. On top of that, some insurance products are so complicated that even the people selling them often don’t fully understand. Who designs these things anyway?

A life actuary works for an insurance company and analyzes the many factors involved: the likelihood of death in various circumstances, the investment returns generated by premiums charged (minus expected payouts), and pricing decisions that balance profit margin with market competitiveness. They have strong mathematical and analytical backgrounds and passing all the exams for full credentialing usually takes several years. In other words, these people make sure the insurance company makes money in the end no matter what happens.

(Fun fact: Being an actuary consistently ranks as one of the best jobs out there due to the combination of high pay, solid demand, and low stress.)

So I was happy to see a post on an investing blog I read called “What Insurance do Actuaries Buy?“. What beer do brewmasters drink? What toothbrush do dentists use? The author David Merkel is a CFA and also used to be a life actuary. Excerpts from his response below:

Actuaries avoid complexity in insurance products. Why? In general, complex products hide high profit margins. Products that are easy to analyze, like term life insurance, are competitive, and profit margins are low.

Also, they tend to use insurance as catastrophe cover, because they know that having insurance companies pay on a lot of small claims is expensive on average.

There is an exception to all of this. If you are so rich as to need to stiff the taxman, buying cash value insurance policies can make a lot of sense. In that case, wealthy actuaries with clever tax advisors buy cash value life insurance. Death benefits do not pass through the estate.

This aligns with most of the unbiased advice I’ve read on life insurance. If a death in your household would be a financial catastrophe, then you need life insurance. Don’t waste money insuring on your cell phone or laptop that will be outdated next month. Use that money to secure your family.

Term life insurance is the easiest to compare across providers, which results in the slimmest profit margins and affordable costs. Term is best for the vast majority of people. More complicated types of life insurance may have proper application in very limited situations for the very wealthy with estate planning needs. A good place to start is Term4Sale.com which doesn’t include every provider but does provide good info and the same prices that an insurance broker would charge you.

This post is participating in the Life Insurance Movement, organized by Jeff Rose of Good Financial Cents, a group writing project about life insurance.

Comments

  1. “In general, complex products hide high profit margins. Products that are easy to analyze, like term life insurance, are competitive, and profit margins are low.”

    That quote from the article is one of the truest and most concise statements I’ve ever read on a finance blog. If you think about it, that same statement applies to almost anything you purchase, not just insurance. It is a powerful idea.

  2. I wonder if we should go with a permanent life insurance policy or a term life. Assuming you take 20 year term-life insurance, its a 1% chance we will ever see it. After 20 years we just lose the money and will not get paid. However a permanent insurance will have to pay eventually. I am not sure of the price differences.

  3. I went through a lot of different ideas regarding life insurance. My wife and I are still young mid-twenties and prices for whole life is a lot cheaper than a middle age person.

    We decided to do a whole-life for an amount we could afford for us it was ($2,000 a year per person around $160,000 whole life). We shopped around and Northwest Mutual was where we decided. The dividend rate is about 6% and after a few years the cash value is more than what you have paid in. The also have been around for over 150 years.

    We also got a ten year term for $200,000 ($107 and $140 yearly), which could wipe out all our debt. We decided on a ten year because we picked the whole life policy. Our goal will be debt free before the ten years are up.

    We probably will no pick up any more term after this last one.

    Now if someone doesn’t want to have whole life but focus on term, I suggest getting 20 year policies every 10 years. It is a neat trick because term is dirt cheap and you can almost guarantee that you will pass away while being covered.

    Now I don’t know which method is cheaper but, the whole life at a young age can protect you if you have health problems in your mid to late life.

    I also picked up a whole life for my baby for $500 a year, it is about $100K policy. What is nice is it can be self funded after 18-20 years.

    http://www.kiplinger.com/colum.....rance.html

    Good link to a whole life dividends amounts

  4. Satish,

    If you want to check out a real example from a few years back:

    http://www.myjourneytomillions.....d-compare/

  5. Ken in Georgia says:

    Satish; I would also say keep a proper perspective on what life insurance is for and don’t get hung up on not getting “paid.” You do not buy auto insurance in hopes of getting into a crash; you do not buy homeowners insurance with hopes that your house will burn down. The purpose of insurance, including life coverage, is to protect you from potential loss. Yet it amazes me that the pitch of life insurance agents always turns to bad mouthing term becaurse you “never get anything back.” The reality is that the cash value and dividends on whole life policies for the first 10-15 years are just a return of your own money. Getting back to the point of the orignial post, actuaries have an obvious knowledge of this — plus the fact the a huge portion of first year whole life premiums are for the agent’s commission — and conclude thanks, but no thanks — I’ll buy term.

    I wonder if they begin to have serious ethical issues over time in working for an industry like this.

  6. Jason D,

    I also have a similar policy on my son.

  7. Jonathan,..do you mind mentioning,which term life insurance company you went with?

  8. Great link Jon! Always fascinating to see an insider’s perspective.

  9. Jonathan

    Great Article. Actuary is actually a low stress and high paying job.

    @Satish
    Permanent Life Insurance, Premiums are much higher than term insurance. and generally we do not need insurance after a particular age.

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