How do life insurance companies make money?

Life insurance companies make money by charging you premiums and investing some of the money they collect. They also profit from canceled or expired policies.

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Amanda ShihEditor & Licensed Life Insurance ExpertAmanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.&Julia KaganContributing EditorJulia Kagan is a contributing editor at Policygenius, where she specializes in life insurance. Previously, Julia was the senior personal finance editor at Investopedia for nearly a decade, a vice president and editorial director at Consumer Reports, the editor of Psychology Today, and the vice president of content at Zagat Surveys.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.
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Ian Bloom, CFP®, RLP®Ian Bloom, CFP®, RLP®Certified Financial PlannerIan Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.

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Expert reviewedExpert reviewedThis article has been reviewed by a member of ourFinancial Review Council to ensure all sources, statistics, and claims meet the highest standard for accurate and unbiased advice.Learn more about oureditorial review process.

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You buy a life insurance policy to provide a cash benefit to your family when you die. But how do insurers continue to turn multi-billion-dollar profits each year when they have to pay out a death benefit every time an insured person dies? [1]

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How does a life insurance company make money?

Life insurance companies make money on life insurance policies in four main ways: charging premiums, investing those premiums, gaining cash from cash value investments, and benefiting from lapsed policies.

1. Charging premiums

Paying your policy premiums keeps your policy in force so that your beneficiaries get the death benefit.

Premiums are carefully calculated by your insurer to cover your death benefit and provide profits to the company. Based on the length of your policy’s coverage and your estimated life expectancy, the premium you pay funds: 

  • Your policy’s death benefit

  • Cost of administering your policy

  • Profit for the insurance company

If too many customers die sooner than expected and they need to pay out more claims than planned, the insurer loses money, which is why underwriting is so thorough and there are harsh penalties for concealing information on your application.

2. Investing premiums you paid

In the years before they need to pay out the death benefit, your insurer invests a portion of those payments. The insurer sets aside enough cash to pay out claims in case of a market downturn and keeps any interest gained.

3. Gaining from cash value investing

An additional investment stream comes from permanent life insurance customers, whose premiums fund both their death benefit and an investment-like cash value feature. The cash value grows at a rate set by your provider.

The funds go into a larger pool of investments managed by your provider, and some of the earnings stay with the company.

4. Benefiting from policy lapses and expirations

Finally, there are some insurance policies that go unclaimed. This might happen with term life insurance, which ideally expires when you’ve saved enough money to self-insure. Permanent policies, which come with high premiums, are often surrendered or lapse when owners can’t keep up with the payments.

While a policy lapse or surrender means the insurer is no longer liable for the payout on the policy, it also loses premiums that could have been invested. Most insurers charge surrender fees to recoup some of that lost revenue. 

An expired term life policy is ideal for providers because it means they have collected decades of premiums without paying out any claims.

These are the four ways insurers make money on life insurance policies. Most life insurance providers sell other financial products, like annuities, [2] giving them another type of product to bring in profits.

→ Learn more about how to buy life insurance

How an insurer’s profits affect your life policy

As long as your insurance company stays profitable, how the company makes a profit is unlikely to have a noticeable effect on your life insurance policy.

If you own a policy with cash value, you may see gains based on your provider’s investments, while the guaranteed minimum interest should keep you from losing money. 

Your insurance company turns a profit through premiums and investments, but it’s in an insurer’s interest to keep premiums affordable to keep your business. And if your provider has strong finances, it can ensure that your policy pays out to your loved ones when you’re gone.

→ Learn more about how to understand your life insurance policy

More about the life insurance application process

Frequently asked questions

How do life insurance companies make a profit?

Life insurers make a profit on the premiums they charge for policies and invest part of those premium payments for additional gains.

Do companies ever lose money on life insurance policies?

An insurer can lose money on a policy if a policy owner dies earlier than predicted or gives up their policy before the end of the term.

How does the way your insurance company makes money affect your policy?

Your policy generally won’t be impacted by how your insurer makes money. Though premiums contribute to their profits, your premium largely depends on your health and other risk factors.

References

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Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of oureditorial standards.

  1. Insurance Information Institute

    (III). "

    2021 Insurance Fact Book

    ." Accessed April 13, 2023.

  2. U.S. Securities and Exchange Commission

    . "

    Annuities

    ." Accessed April 13, 2023.

Authors

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Julia Kagan is a contributing editor at Policygenius, where she specializes in life insurance. Previously, Julia was the senior personal finance editor at Investopedia for nearly a decade, a vice president and editorial director at Consumer Reports, the editor of Psychology Today, and the vice president of content at Zagat Surveys.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Ian Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.

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