Casinos and insurance companies have more in common than you might think.   

Casinos know the odds and probabilities of every game.  They know the odds are in favor of the casinos, not the people placing bets.  So, casinos spend a lot of time and money getting people and their money to the gaming tables, slots, sports book, etc.  Casinos know the more money that is wagered means the more money for the casino. 

Insurance companies don’t use oddsmakers, but they do use actuarial science, which is the mathematical and statical analysis that defines the risk and possibility of profits when issuing life insurance policies or annuity contracts.  Insurance companies are very interested in understanding how long people typically live, and are even more interested in understanding the law of averages on when people pass away.   

This is how insurance companies can price life insurance policies for people of different ages and health conditions, knowing that they will make money overall, even if some policyholders pass away earlier than the statistical average.  Think about it: life insurance companies lose money when someone buys a $500,000 life insurance policy, pays a few months of the premium, passes away and the company has to pay the death benefit.  That’s because, most likely, the company didn’t get to collect $500,000 in those first few months.  But that probably doesn’t happen very often (and they know that).   

Conversely, insurance companies make a lot of money when someone (like me) buys a $500,000 life policy with a 20-year term, pays the premiums for 20 years, and then allows the policy to expire.  The bad news is, I didn’t get to collect on the policy.  The good news is, I outlived the policy!  This is probably more often the typical scenario (and they know that, too).     

One other thing you need to know about life insurance and annuity contracts is they typically pay sizeable commissions to the agent.  These commissions are often “hidden” from the consumer.  I’ve even heard clients say they have been charged “no fees” when this is probably not the case.  For example, if you purchase an annuity contract for $100,000, you will probably see a “benefit value” for the same amount.  But if you wish to terminate the contract during the “surrender period,” you can be charged a significant fee, reducing the amount you receive back.  These surrender charges allow insurance companies to pay upfront commissions to their salespeople and recoup their costs if an owner terminates the contract early.  

In summary, I would like you to be aware that life insurance companies, like casinos, know the odds of their ability to make a profit on their life insurance and annuity contracts.  And in times like these, when fear of the current market downturn is a big driver for many, these insurance companies know that they can cash in on that fear.  Don’t fall for their marketing – do your due diligence and ask your advisor for perspective on how, or if, a specific insurance product fits into your financial goals.  

I’m happy to help anytime.