Life insurance companies are no different than any other business. They must price themselves to make a profit or they could not exist.
Term Life insurance is the easiest to explain. They take in $400 per year in premiums for example. They only sell this policy to young healthy people at this price. IF you die while insured they will pay your beneficiary $250,000. If very many people died, this would never work.
The life insurance company has run the numbers and knows exactly how many people with that policy will die while insured. It's very very few. Most people will pay that premium for 20-years and never receive anything back.
The money a life insurance company collects in premiums minus what they pay in claims minus their operational costs = their profit.
Insurance Adviser - Broker, SC Insurance Services, Oahu, Hawaii
That's a question many have wondered about, but it's really quite simple. First the premiums collected are invested in diversified investments and provide the basis of any dividends that are paid out. Additionally, particularly on the Term policies that the provider issues, there are a large percentage of clients who never collect on the death benefit, because they either out live the policy or let the policy lapse. Finally there are those who allow their whole life policies lapse without having accumulated cash or surrender value. So those premiums that had been paid stay with the provider and are invested.
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Term Life insurance is the easiest to explain. They take in $400 per year in premiums for example. They only sell this policy to young healthy people at this price. IF you die while insured they will pay your beneficiary $250,000. If very many people died, this would never work.
The life insurance company has run the numbers and knows exactly how many people with that policy will die while insured. It's very very few. Most people will pay that premium for 20-years and never receive anything back.
The money a life insurance company collects in premiums minus what they pay in claims minus their operational costs = their profit.