How do Life Insurance companies make money?
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7 Responses
1.31.2010
Good question to ask, more people should be curious. Each product is priced differently.Whole Life insurance like all plans, is priced by actuarial accountants. These are the people that when you were in university were studying in the room next door while you were playing drinking games. They do calculations based on over a hundred years of mortality and morbidity rates to determine claims experience, cancellations etc. which allow them to build in a profit margin for all products.This particular product builds a cash reserve with all the premiums paid by all policy owners. It is sort of like a massive pension plan from which liabilities are paid (claims,admin costs, commissions, company profits) The residual is paid out to policyholders in dividends or cash value. So the answer is, don't worry the profits are priced in. In the real world this profit is magnified by two main things that very few people in and out of the financial industry are aware of:1) Life expectancy is always increasing so when you buy the policy at age 35, life expectancy is 82. By the time you get there it will be 88 so the insurance company will end up with 6 more years of premiums than they factored in.2) Cash values built up through dividends on whole life plans are very enticing to people who don't manage money well so one day when they glance at their statement and see thousands of dollars just sitting there teasing them, they can't resist cancelling the policy and buying that big screen TV they wanted. Bingo, liability ends for the insurance company, they keep all the premiums paid, pay out some of the interest and pocket the rest.
1.31.2010
Whenever you come across the term insurance whether it is a life insurance, vehicle insurance, realestate insurance, it means that somebody is there to take care of the risk of loss that you might face in future. Your future is unpredictible and anything might happen to you.Insurance companies runs well with a good volume of customer. For each insured they charge premiums depending upon their history. Say Met life has 20,000 customer locally and charges $300 per customer annyally. They make $ 6,000,000 annually (This is a straight calculation-a lot other thing are involved in this revenue like taxes) Say they have 5 customers who had suffered losses and insurance need to cover that so the insurance will pay 5*50,000= $2,50,000. So out of 6 million they suffer 2.5 million the rest 3.5 million is their profit. So the bottom line is premium is the key, they make a lot from little premium they charge with their millions customer.Any financial institution do not necessarily wait for their money and save it in thier lockers! They invest them in some other forms to generate more money. Money mobility is high once it goes out of your pocket. Source(s): Straight out of my brain.
1.31.2010
The same way health insurance, homeowners insurance, and car insurance, VOLUME. A lot more people pay premiums than the insurance company pays in claims (usually). They also invest as previously noted. They have designated banks that hold their funds and they gain interest on these funds.
1.31.2010
SImply stated, they count on people not being able to afford the policy or losing sense of it's value and letting it lapse. Also as someone said they invest the money and collect interest for years. Another thing insurance companies do is take out reinsurance. They buy insurance to cover the insurance they have sold Source(s): Financial Rep
1.31.2010
They invest the premiums.
1.31.2010
Insurance companies have math experts called Actuaries. They analyze life expectancies, company expenses, what the company earns on it's investments and lapse rates (people who drop their policies) and set the rates. They also won't issue a policy if you are in poor health.They are dealing with large numbers of insureds. So there may be a 100,000 people like your friend paying this premium each year and af few die and their beneficiaries get paid, some let the policy drop and the insurance company gets to keep/invest that money for future claims, and most live and keep paying. Remember life expectancy is getting longer so insuring a life is cheaper.They make money because they set the rates slightly higher than they need to cover the future claims.
1.31.2010
Well, they don't. For whole life insurance policies, about 90% cancel within the first five years. Only about 30% of the people who die in the US have active life insurance in place at the time of death. Of course, that's factored into the rates, too.Insurance companies in general, do NOT make their money off the premiums. They usually pay out just about what they take in (except for car insurance, workers comp, and house insurance, where they pay out MORE than they take in, overall). They do have a bunch of money set off to the side to pay claims – called RESERVES. They invest this money, and they make their REAL money off of the investments. Source(s): agent, 21+ years