What’s The Relevance Of Time Value Of Money Issues To Policies Of Life Insurance?
Posted December 25, 2009 – 10:16 am in: structured settlements FAQmay refer to ways in which the principle of time value of money is used by life insurance companies when setting insurance premiums,recognising that the people seeking such policies each have different characteristics.
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When you buy life insurance, you give money to the insurance company, and they don’t have to pay your beneficiaries the amount of the insurance until you die, which will probably be many years. In the meantime the insurance company invests the money in various financial instruments, with the expectation that these instruments will increase in value. The longer the company has to invest the money, the more they can expect to earn.
The time value of money refers to the fact that an amount of money now will be worth more in the future, if it is invested. that’s how the company makes enough money to pay the benefit. The longer you live, the more time the company has to invest the money before it has to pay up. The older you are when you buy the insurance, the amount of time you have to live before you die is smaller. Also, the worse health you are in when you buy the insurance, the amount of time before you die is also smaller. That’s why older, unhealthier people have to pay more premium for an insurance policy than younger, healthier people. It’s all because of the time value of money—the more time the company has to make more money off the premium you pay.