[iAMfromHuntersBar]

Hi everyone!

I'm just curious;

I know that a motor insurance company makes money on the fact that not everyone crashes their car, so those premiums are a clear profit.

But how do life insurance companies make a profit? Everyone who takes out a policy is guaranteed a payout!

Is it a interest thing, or are they, like motor insurers hoping that some people won't claim the payouts?

Cheers

J

[excon]

Hello J:

They invest their money. They hold mortgages, stocks and bonds and lots and lots of real estate.

excon

[Curlyben]

Now there are different types of policy with numerous different terms, so it really depnds on what sort of policy you are thinking of.
WHOLE life policies are invested and the companys skim profits off this investment.
Then there's policies that run for a limited amount of time, say 5 years to cover a loan. This work in a similar way to car insurance, just a different product.

Thinkk that about covers it really.
Bear in mind you are making a regular payment every month and part of this will be taken as their "admin fees" anyway.

[ScottGem]

As pointed out, Life insurance as many flavors. All insurance is a gamble. The insurance company is gambling that you won't make a claim, either at all or in a certain time frame. You are gambling that you will. Only in the insurance biz, you would be just as happy if the insurance company wins the gamble.

Insurance companies make money in two ways. First by taking in more in premiums then they pay out in claims. Second, even with property (home, auto, etc.) insurance, they invest the premiums and make money that way.

[iAMfromHuntersBar]

Excellent answers guys, thanks a million, that's sorted that in my head a lot more!

[kevinNWML]

Life Insurance companies make their money by selling term insurance. Only 3% of total death claims come from term insurance. That means 97% of term policies do not get paid out. Most deaths occur after the term is over, and people do not renew their policies because of the increase in premuims at the older age.
This is all in contrast to Whole Life Policies which payout 100% of their death claims because they are inforce at the time of death. Although the premuims for a whole life policy are initially higher, if you compare them to the cost of renewing the term in the future, it usually makes sense. A combination of term and whole life is usually the best way to go.
And the whole buy term invest the difference pholisophy is a fallacy. Look into the return on a whole life policy from a Mutual Life Insurance company as oppose to a publicly traded Stock Life Insurance company. It will surprise you. Especially a company like Northwestern Mutual. It is a really good long term investment and great diversification part of your total portfolio. Also they're actually a lot of living beneifits that are associated with them, including a vehicle that you could use to subsidize your retirement income.

[FreshwaterOcean]

From what I understand, that's true. But, insurance companies can't count on current clients to completely fund all possible claims, nor do they want to have more cash sitting around than truly necessary. So, in order to realize gains on their money and still have the liquidity required for future claims they invest a substantial amount of money in commercial real estate where the value of their investment is appreciating while they are still receiving rent which keeps them liquid.

[ScottGem]

There are a variety of investments that insurance companues can make to to maintain a cash flow while getting a return on their investment. Commercial real estate is just one of them.