Friday, June 17, 2005


I finally purchased some life insurance, and my policy just came in the mail yesterday. My work gives me twice my salary, which is nice, but wouldn't send my kid to college after paying off the house and my other debts, so I opted to buy some more. $250,000 more, to be exact.

So what is the likelihood of someone like me dieing in the next 20 years? Thanks to my insurance company and some unresearched assumptions, I have a rough idea that it's about 1 in 125. Here are the basic facts:

I am a 34 year old white male.
I don't smoke or drink.
My blood sugar and cholesterol are normal.
My resting heart rate and blood pressure are normal.
I am a parent.
I live in the suburbs doing white-collar work.
I excercise moderately.
I don't have any diseases.
I don't have a criminal record.
I haven't been involved in a traffic accident in the last 10 years.
I have had two traffic citations in the last 10 years (one speeding, one running a stop sign).

Apparently that profile is good enough to qualify me for "preferred", but not "super preferred", which would require me to be a little younger and skinnier, and a slower driver. I came to my 1 in 125 estimate by running the numbers and guessing at the insurance company's expected profit.

$300 per year buys me a 20 year term of $250,000.
$300 * 20 = $6,000 to the insurance company at the end of the term.
$250,000 / $6,000 = about 42.

So basically to make any money off of this policy, it would need to be sold to myself and 42 of my peers, and only one of us dies in the next 20 years. They would do little more than break even after holding our money for 20 years, which I doubt is good enough for them. No, they want to make 5% a year or more on our money. Let's run the numbers that way:

$cash = 300;
while (++$counter < 20) { $cash *= 1.05; $cash += 300 }
$cash ends up being 9919.78623086652, according to my trusty perl interpreter.

That makes about $10,000 per policy that they want to have after 20 years from our $6000 per policy investment, for a profit of $4000 per policy. A little basic algebra gives us:

6000x - 250,000 = 4,000x
2000x = 250,000
x = 125

The insurance company can only make 5% a year on our premiums if it sells to 125 people like me, and only one of us dies. Hence, my peers and I have a 1 in 125 chance of dieing in the next 20 years. Assuming that my wildly slung together numbers and my insurance company's life expectency estimates have anything to do with reality.

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