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. But what I want to

do in this video is think about given

these numbers that have been quoted to me by

the insurance company, 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.

sal, can you do a time value adjustment version?

i <3 actuarial 😀

Hey Sal, even I found listening to this a bit morbid. It flashes not so pleasant pictures in my mind. May be you can do another similar video with some different analogy and not talk of your death. But really informative video. Always a pleasure listening to you! Thanks.

Nice and easy, clear as always. Though this really needs to take discount rate in account. Though that would be complex. Wouldn't you also need a distribution of when during those 20 years there would be one less Sal's among come think of it? It would be more likely during the last years after all. maybe a good reason not to do it more advanced I guess:D

thanks

Thanks a lot Sal. I was expecting a lot more complex example rather than such a simplistic one

Just go to google, and get the free YouTube Downloader. Save video in your Favorites until you do.

I really got a lot out of this video. thanks so much.

No don't you die on us Sal!

was this a cliffhanger?

Before applying assess your situation. The application process is not just about your current health it is about your health, financial, and personal history – ALL OF IT.Be sure you are comfortable with giving insurance companies full access to that information. Also, the questions are totally invasive so any mis-communication can be used against you as a reason to deny coverage to your beneficiaries. My advice is live as healthy as possible, save your money, and don't go into debt.

Thanks for this video, I know a thing or two about actuarial sciences now!

100 Sals! The worlds math problems would be solved!

I bet by now he has his house paid off.

these guys stole your video

http://www.cnbc.com/id/44539806

Why are insurance bills called PREMIUMS?

Don''t you also have to account for the investment return the insurance company can make in 20 years before a potential payout?

please also do upload numerical questions related to whole & term life insurance.

Don't die too early Sal, Let us milk you more 😀

I don’t know why, but every other video on my YouTube works perfectly normal, but this one keeps freaking out

This is the break even only if one sal dies exactly after 20 years (after paying his premium for 20 years, not in anytime in the 20 years ). If he dies anytime before that 20 years, the insurance will face loss. So, the probability of sal dying in the next 20 years is sadly greater than a 1 in 100.

loved the example!!