The Law of Large Numbers and Mortgage Insurance Policies

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How can insurance companies pay out these large death benefits?

The Law of Large Numbers and Mortgage Insurance Policies

It's natural to wonder how insurance companies can pay the death benefits on all the Mortgage Insurance Policies out there. When you consider how low the premiums are for such large death benefits, it seems unlikely that an insurer would actually be able to fulfill their obligation to pay your death benefit.

Mortgage Insurance Policies are priced based on the Law of Large Numbers. The Law of Large Numbers is a method of predicting an outcome based on statistical averages of similar groups. Mortgage Insurance Policies are priced in such a way that the premiums, when pooled, create more than enough available funds to actually pay out what will be needed for actual death benefit claims based on the statistical findings of the Law of Large Numbers. The insurance companies then put into reserves that amount of pooled premiums that will actually be needed (and that regulators require of them) so that they'll have enough funds to fulfill their obligations to policyholders.

   

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