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Q&A… how life insurance works…
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Question
I would love to go with Pinnacle Life but I have one concern. If they cover you till you’re 100 there is a 100% chance to have to pay you back the amount you’re covered for. I have put together a quick spreadsheet and having approx 40NZD and approx 8% per year interest I could not “save” even 300.000 NZD in 50 years while I would be insured for 420.000NZD… What am I missing here?!
Answer
This is a great question because it goes to the very heart of how insurance works…
What you have not factored into your calculation is that your monthly payments increase slightly every year as you get older and as your risk of dying increases.
Furthermore, you need to remember that most people don’t continue with their policy till age 100. The purpose of life insurance is to financially protect those people that are dependent on you. By the time you’re 60 or 70, most people have paid off the mortgage and no longer have financial dependants… their children generally earn their own income. So they no longer need the insurance and they either reduce their cover or cancel their policy completely.
In this way, life insurance is similar to car insurance… you only need car insurance while you have a car. Once you sell your car you no longer need the insurance and you can cancel your policy and stop paying.
A further point to note is that if you die after only one year, your calculation shows you would only have paid around $480 and you would stand to collect $300,000. That is not going to happen if you try and insure your life through a savings account!
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