This is a very simple overview of a very complicated business.
Once you have a basic knowledge of the building blocks of life insurance you will be able to begin to understand how a well run company can be profitable.
A life insurance policy has three main components investment earnings, mortality and expenses. How well a company does relative to the projections it bases premiums on these determines how profitable it is. The more conservative the projections the more potential for profit and of course the higher the premium.
If you would like a more detailed answer, you may contact me.
Co-Founder, TermInsuranceBrokers.com, Goldenzweig Financial Group, Las Vegas, Nevada
There's many ways insurance companies make money. The most common way that people are familiar with is the carrier uses the premiums that they collect for the coverage they provide and investing a portion of it to grow those funds. Carriers are required to maintain a certain level of reserves so they can pay out claims on policies.
Great question! The very ,very simplified answer is this - they make money in some ways like a bank does. The money you pay in premiums acts like the money you would deposit. The bank invests it, and makes money off of yours. Insurance companies do the same thing. Both charge fees for their services; and will charge interest on money borrowed. Insurance companies can also make or lose money on the length of the lives of the policy holders - if you buy a policy, and pay on it for 3 years, and suddenly pass, the company will take a hit. But if you have a small policy, and pay on it for many, many years, they have plenty of time to invest and reinvest that money, and make a profit. I hope that helps, if you still have questions, contact me, I'd be happy to help. Thanks for asking!
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
Insurance companies have several streams of income. They make money on underwriting if their loss ratio is less than anticipated due to careful risk selection, they earn a profit. If the stream of premium payments remains in the company for any appreciable time they earn interest.
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Once you have a basic knowledge of the building blocks of life insurance you will be able to begin to understand how a well run company can be profitable.
A life insurance policy has three main components investment earnings, mortality and expenses. How well a company does relative to the projections it bases premiums on these determines how profitable it is. The more conservative the projections the more potential for profit and of course the higher the premium.
If you would like a more detailed answer, you may contact me.