Question : How do Life Insurance companies make money?
Someone I know has a whole life insurance policy with Metlife with a face value of $50,000. The annual payment is $290. How does Metlife earn money when they pay out much more than they get in?
- asked by darkmanx1209
All Answers:
Answer #1
They invest the premiums.
- answered by src50
Answer #2
Well, they don't. For whole life insurancepolicies, about 90% cancel within the first fiveyears. Only about 30% of the people who die inthe US have active life insurance in place at thetime of death. Of course, that's factored intothe rates, too.Insurance companies in general, doNOT make their money off the premiums. Theyusually pay out just about what they take in(except for car insurance, workers comp, andhouse insurance, where they pay out MORE than theytake in, overall). They do have a bunch of moneyset off to the side to pay claims - calledRESERVES. They invest this money, and they maketheir REAL money off of the investments.
- answered by mbrcatz17
Answer #3
The same way health insurance, homeownersinsurance, and car insurance, VOLUME. A lot morepeople pay premiums than the insurance companypays in claims (usually). They also invest aspreviously noted. They have designated banks thathold their funds and they gain interest on thesefunds.
- answered by Luke 6:37
Answer #4
Whenever you come across the term insurancewhether it is a life insurance, vehicle insurance,realestate insurance, it means that somebody isthere to take care of the risk of loss that youmight face in future. Your future is unpredictibleand anything might happen to you.Insurancecompanies runs well with a good volume ofcustomer. For each insured they charge premiumsdepending upon their history. Say Met life has20,000 customer locally and charges $300 percustomer annyally. They make $ 6,000,000 annually(This is a straight calculation-a lot other thingare involved in this revenue like taxes) Say theyhave 5 customers who had suffered losses andinsurance need to cover that so the insurance willpay 5*50,000= $2,50,000. So out of 6 million theysuffer 2.5 million the rest 3.5 million is theirprofit. So the bottom line is premium is the key,they make a lot from little premium they chargewith their millions customer.Any financialinstitution do not necessarily wait for theirmoney and save it in thier lockers! They investthem in some other forms to generate more money.Money mobility is high once it goes out of yourpocket.
- answered by suwalnavin
Answer #5
Good question to ask, more people should becurious. Each product is priced differently.WholeLife insurance like all plans, is priced byactuarial accountants. These are the people thatwhen you were in university were studying in theroom next door while you were playing drinkinggames. They do calculations based on over ahundred years of mortality and morbidity rates todetermine claims experience, cancellations etc.which allow them to build in a profit margin forall products.This particular product builds a cashreserve with all the premiums paid by all policyowners. It is sort of like a massive pension planfrom which liabilities are paid (claims,admincosts, commissions, company profits) The residualis paid out to policyholders in dividends or cashvalue. So the answer is, don't worry the profitsare priced in. In the real world this profit ismagnified by two main things that very few peoplein and out of the financial industry are awareof:1) Life expectancy is always increasing so whenyou buy the policy at age 35, life expectancy is82. By the time you get there it will be 88 so theinsurance company will end up with 6 more years ofpremiums than they factored in.2) Cash valuesbuilt up through dividends on whole life plans arevery enticing to people who don't manage moneywell so one day when they glance at theirstatement and see thousands of dollars justsitting there teasing them, they can't resistcancelling the policy and buying that big screenTV they wanted. Bingo, liability ends for theinsurance company, they keep all the premiumspaid, pay out some of the interest and pocket therest.
- answered by John A
Answer #6
Probably best to do some homework about yourconfusing area.Here is a great startpoint.
http://lifeinsurance.online-helpers.info/cheapest-life-insurance.html
- answered by PATRICIA M
Answer #7
Insurance companies have math experts calledActuaries. They analyze life expectancies, companyexpenses, what the company earns on it'sinvestments and lapse rates (people who drop theirpolicies) and set the rates. They also won't issuea policy if you are in poor health.They aredealing with large numbers of insureds. So theremay be a 100,000 people like your friend payingthis premium each year and af few die and theirbeneficiaries get paid, some let the policy dropand the insurance company gets to keep/invest thatmoney for future claims, and most live and keeppaying. Remember life expectancy is getting longerso insuring a life is cheaper.They make moneybecause they set the rates slightly higher thanthey need to cover the future claims.
- answered by J
Answer #8
SImply stated, they count on people not beingable to afford the policy or losing sense of it'svalue and letting it lapse. Also as someone saidthey invest the money and collect interest foryears. Another thing insurance companies do istake out reinsurance. They buy insurance to coverthe insurance they have sold
- answered by Al
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