Life insurance companies make money through the premiums that policyholders pay for their coverage. When a policyholder pays a premium, a portion of that premium is used to cover the cost of providing the policy (e.g., administrative expenses, commissions to agents, etc.), while the remainder is invested by the insurance company. The investment income generated by these funds is a major source of revenue for life insurance companies.
Another way life insurance companies make money is through the difference between the premiums they collect and the death benefits they pay out. Because most policyholders outlive their term life insurance policies, the insurance company will collect more in premiums than it will pay out in death benefits. The difference between these two amounts is the insurance company’s profit.
Additionally, some life insurance companies also sell other types of insurance, such as health insurance, homeowners insurance, or car insurance. They can earn profits from these as well.
Some permanent life insurance also has a savings component called cash value, which grows over time and can be borrowed against or used to pay premiums. The insurance companies make money from the interest earned on these cash values.
It’s worth noting that not all life insurance companies make the same amount of money. Factors such as the company’s size, the types of policies it offers, and its investment portfolio will all impact its profitability.
