The older you get, the more likely you are to die. And the more likely you are to get disabled or be unhealthy. There is plenty of insurance available for these events, the problem is that theoretically the premiums on this insurance should increase as you get older. By retirement or so, the cost of insurance can become unaffordable.
As an actuary with ten year of experience I’d like to shed some light on how the cost of insurance is structured for policies that are expected to last for decades.
Since paying exorbitant amounts for insurance as you age is unpalatable to most people the insurance industry invented the level premium policy long ago. Every policyholder is charged a constant premium for insurance over the course of their lives, no rate increases, that is above the theoretical amount of claims the company will have to pay you when you’re young but under the theoretical amount when you’re older. The excess premium you’re paying at a young age goes into a savings account, called a “reserve.”
This reserve is saved up over time to pay for the future claims on a policy. In the meantime the insurer is holding the reserve until the policyholder needs it, invests the money to produce investment income and capital gains that pay for future policyholder benefits, and a portion of the investments earned are credited back to the policyholder.
Overall life and health insurance charges are higher than they theoretically need to be for young people, but the insurer puts their money in a savings account for them, while charges are lower than they theoretically need to be for older people as the insurer allows them to deplete the savings account set up for them. Policyholders benefit by always getting something for their money and in a competitive environment they get low rates to boot.