The Box The Key to Understanding Life Insurance….. Click to continue

Mortality Tables Many people say they are confused by life insurance. Because of its complexity, structure and pricing many buyers are left mystified. But simply put, life insurance is a mathematical science based on a predictable pattern of death. People die according to a very accurate and predictable pattern. This pattern is based on historical records and is called a mortality table. This table is used to determine the price of life insurance. For example, suppose there were 10,000,000, 45 -year-olds who all wanted to buy $1,000,000 of life insurance. We know statistically that in the first year of coverage, one out of 1000 will die. We don’t know who will die, just how many. Click to continue

Mortality Cost Because we know how many will die, we can determine exactly how much each person must put into the pot to pay their share of the predicted claim during the year. This share is called the mortality cost. In the first year, the mortality cost for a 45- year-old is approximately $1000. These mortality costs will increase each year as the insured gets older. This is called “term” insurance Click to continue

Mortality Curve By graphing these costs, they create a mortality cost curve. Notice how steep the curve becomes as more people die. Click to continue TodayAge 100 cost At life expectancy (the age when half the people in the group will be dead), all of the mortality costs will equal about 74% of the policy face amount. Therefore, $1,000,000 of life insurance could cost $740,000 at life expectancy.

Adverse Selection So assume you’re at your life expectancy age and you just got your premium notice. Instead of it being only $1,000, the premium has increased to $150,000. Would you pay it? Not a chance! But suppose you just found out you were terminally ill. Now would you pay the premium? Most everyone says they would. Your ability to choose whether or not to pay, based on your health, is called ADVERSE SELECTION. Suppose you owned a life insurance company where all the sick people kept their insurance and all the healthy people canceled. It wouldn’t be long before your company went bankrupt. We learned the impact of adverse selection from history. Prior to 1835 many U.S. insurance carriers had to reorganize in order to avoid this very problem. The carriers asked the actuaries to develop a solution, so they created THE BOX. Click to continue

The Box The actuaries found there are four pricing factors that affect the cost of life insurance. THE BOX is based upon the company’s: 1. Actual mortality costs, 2. Persistency (how long policies remain active), 3. Interest rates, and 4. Expense loads These four pricing factors combine to become what is called the company’s EXPERIENCE. Click to continue EXPERIENCE

The Box The actuaries said when you put enough money into the BOX, compound interest and overall favorable company EXPERIENCE will sustain the policy for your lifetime. This is true for whole life, universal life and variable life policies. How much money does it take to fill the BOX? It depends upon the assumed interest rate, the number of years you are willing to pay premiums and the expense loads charged by the company. There’s only one problem with the BOX. Company experience directly affects performance. Experience can go up and experience can go down. If experience improves your share could decrease but if experience worsens, your share could increase. Click to continue

The Box In the final analysis, if you want to own your insurance for your entire life, you must either: TodayAge 100 cost Pay the curve, $1000 $150,000 or fill the BOX! It’s your choice! And the answer depends on how long you want to protect your family or your business.