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Average life insurance for a 60-year-old man costs about $400 per month for a 20-year term (starting today) with a $1,000,000 payout. If I reason that the average 60-year-old man has a 35% probability of dying within 20 years and long-term savings rates will stay below 6%, it seems insurance companies will lose money (and should be charging more like $800 per month).

Where is my mistake?

I am tempted to buy life insurance for random 60-year-olds.

  • "If I reason that the average 60-year-old man has a 35% probability of dying within 20 years" that means he has a 65% chance of living beyond age 85. That's wrong, based on the SSA's actuarial life tables, which says that the average 60yo male will life until age 81. ssa.gov/oact/STATS/table4c6.html – RonJohn Oct 9 at 17:30
  • You're missing the underwriting. Have you actually seen a real offer for a real 60 year old for $1,000,000 of 20-year term insurance for $4,800 per year? Or have you seen quotes that require a medical exam and underwriting (and rating) before they become offers. – quid Oct 9 at 17:34
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    Right, so you've seen some aggregated average quotes, not offers of coverage. Also, you can't buy life insurance on random people, you need to be able to demonstrate an insurable interest. – quid Oct 9 at 17:40
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    I guarantee that the insurance companies have better statistics than you do and are not losing money in the overall insurance game. – D Stanley Oct 9 at 17:54
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    Term insurance is not an investment. If all goes well, you get nothing back from it until you're dead, when you have no need of it. If you think you need life insurance at 60, you've done something wrong. Term insurance is great when you're young and you want something for your children should you die before they are self-sufficient. But why would anyone think they need it when they are 60? – Ray Butterworth Oct 10 at 2:14
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In large part answer here is that there is no reason to rely on the numbers presented in an article about buying life insurance where the word underwriting doesn't even appear written by a random person for a blog that exists for click revenue.

That being said the issue here isn't that the premium is more like $800 per month, the answer that it is pretty unlikely that an insurer will write the coverage at all in the situation presented in your question. In the real world, it is difficult for a 60 year-old to get through underwriting, period; and you can't buy coverage on another person where you don't have an insurable interest.

While the author of that "article" is correct that life insurance gets more expensive as you age, what she omits is that it's also more difficult to buy at all as you age because a person's general health deteriorates over time. The average premium paid per $1,000 of coverage issued at age 60 has nothing to do with the average 60 year-old. The population of people who can get through underwriting at age 60 will skew hard toward the most healthy 60 year-olds. This is an extremely under recognized benefit of whole-life for young people.

An insurer collects premium in aggregate. If an insurer is issuing 20-year term coverage, it's because after collecting your medical records and giving you an independent medical exam, the underwriters are pretty sure you (not the average person at your attained age) are going to live longer than 20 years. This isn't unique to 60 year-olds.

  • I'll wait a few days for comments, but will probably mark this as the answer. The simplified answer to me is that my 35% should really be like 10%. 35% is true for all 60-year-old men, but 10% seems fair when you condition on passing the health exam. I didn't realize health exams were so good, but now it almost seems obvious. – bobuhito Oct 10 at 5:47
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The deaths are not evenly distributed over the 20 years. The earlier years have lower probability of death and some may stop paying. For example someone might stop paying at age 70 and then die at 75.

  • I have looked at mortality rates vs age, but even if the 35% died at 80, it seems that buying insurance is a good investment. But, you're also saying that insurance companies are counting on a lot of people stopping their policy early...that's hard to believe because that stopped "policy tail" is even a better investment. – bobuhito Oct 9 at 17:27
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    @bobuhito, and you're assuming rational decision making and equal utility of the money pre and post death for the insured person. Life insurance is a terrible investment for the insured person. – quid Oct 9 at 17:32
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Life insurance can be an investment for third parties.

In the comments there is a discussion that the OP cannot buy insurance on random 60 year olds without an insurable interest. There is a legitimate path to end up holding insurance policies on third parties: viatical settlements. Historically, some lesser amount than the death benefit is offered to an insured individual with a terminal diagnosis, so that they can use part of the benefit while still alive, the finance company pays the remainder of the premiums and the finance company recoups the full benefit on death, presumably making a profit.

Original post can get there with a process change

This path is slightly indirect to the scenario as laid out in the original post, but presumably the OP can recruit a pool of 60 year olds, offer an agreed consideration for any who get underwritten policies for their participation in this, and take over the policies from day one.

Is it a good investment?

In the late 1980s, financiers thought they had a winner in using viatical settlements to buy life insurance policies from people who turned up with AIDS diagnoses.

Due to innovations in medicine, it turned out this is a particularly risky investment.

  • This is only tangentially related to the question. – RonJohn Oct 10 at 13:53
  • @RonJohn Fair. I added narrative to bring it nearer to the spirit of the question. – user662852 Oct 11 at 12:38

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