How do life insurance companies make money?
If you’ve ever wondered how life insurance companies make money, the answer is pretty simple. With premiums, investments, and policy lapses, life insurance companies can make enough money to stay afloat, pay out death benefits, and make a profit. Most insurers earn a profit margin of 4.1% on average.
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Benjamin Carr
Former State Farm Insurance Agent
Benjamin Carr worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and informed his clients about their life, health, property/casualty insurance needs. Assessing risks and helping people find the best coverage to suit their needs is a passion of his. He appreciates that insurance was designed to protect people, particularly during times...
Former State Farm Insurance Agent
UPDATED: Jul 29, 2023
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Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
UPDATED: Jul 29, 2023
It’s all about you. We want to help you make the right life insurance coverage choices.
Advertiser Disclosure: We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance company and cannot guarantee quotes from any single company.
Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different life insurance companies please enter your ZIP code above to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- Since life insurance companies pay out multiple claims, policyholders may wonder how life insurance companies make money
- Life insurance companies earn revenue through premiums, investments, and lapsed policies
- Life insurance companies’ investments make up a large portion of the revenue that supports a company
Since life insurance companies pay out multiple claims per year, you may wonder how life insurance companies make money if claims sometimes eclipse the amount earned in premiums. The answer is that life insurance company profitability is based on more than just the amount it earns in premiums. While some of life insurance company revenue comes from premiums, the best term life and best whole life insurance companies also earn revenue from careful investments and lapsed policies.
We’ll review all the details of life insurance company revenue below, from how life insurance companies make money to the different types of life insurance policies.
How Life Insurance Companies Stay Profitable
A life insurance company’s business model is based on risk, as they primarily earn income from premiums and investments. They also earn money when customers let their policies lapse.
Life Insurance Companies Revenue and Lapse Rates
| Source | Revenue/Rate |
|---|---|
| Life Insurance Revenue | $143.1 Billion |
| Investment Income | $186.0 Billion |
| Overall Policy Lapse Rate | 4.00% |
| Term Policy Lapse Rate | 6.20% |
Investments and lapsed policies help insurance companies stay profitable even if the amount of claims paid in a year equals or exceeds the amount of premiums received. Whether the profit exceeds or is less than expenses is known as a life insurance underwriting profit margin.
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Investing Your Life Insurance Premiums
Investing your premiums is one of the main income streams for life insurance companies. Life insurance companies invest premiums into very low-risk investments to maintain a reliable income stream.
It’s important to note how much an insurance company profits from investing in premiums can affect the policyholder’s insurance. If a company doesn’t earn enough in investments and policy lapses to offset the cost of claims, it could affect future life insurance premiums.
A company could also go under and declare bankruptcy, turning the policies over to a new life insurance company. So when picking a life insurance company, it’s important to look into its financial strength before signing up.
Profits From Your Cash Value Life Insurance
Suppose you have a cash value life insurance policy, also known as a life insurance savings account. In that case, the life insurance company invests the cash value portion of your policy for you, helping you grow your life insurance cash value.
Below, you can see the different earning margins of cash value investments at different insurance companies.
Net Profit Margin by Insurance Type: Comparative Analysis
| Type of Insurance | Net Profit Margin (TTM) |
|---|---|
| Life Insurance Companies | 4.10% |
| Property and Casualty Insurance Companies | 23.26% |
| Insurance Brokers | 8.70% |
| Accident and Health Insurance Companies | 5.53% |
Life insurance companies earn the smallest net profit margin compared to other insurance companies, likely because not everyone chooses to have a cash value component on their life insurance policy. In addition, the cash value income is smaller than what a company earns from premiums. The biggest earner of profit sources for life insurance companies is premium investments.
Life Insurance Policy Cancellations and Lapses
Cancellations and lapses are another source of revenue generation in the life insurance industry. When a policyholder lets a policy lapse by not paying their premiums, the life insurance company keeps the premiums paid over time and investments without returning anything to the policyholder. If you accidentally allow your life insurance policy to lapse, read our article on how to reinstate a lapsed life insurance policy for a breakdown of steps to take.
Likewise, if a policyholder cancels their life insurance policy, they may only get a small portion of their premiums back, if any at all. With term life insurance policies, the policyholder also doesn’t receive any premiums back when the term life insurance policy ends unless they have a return of premium life insurance policy.
Overall, the bottom line is that life insurance policy cancellations, term periods, and lapses are a financial boon to companies, as they get to keep premiums without paying out a claim.
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Considering Policyholders’ Risks When Setting Life Insurance Quotes
Another way life insurance companies stay profitable is by making sure they don’t take on high-risk policyholders. For example, terminally ill patients attempting to buy a policy is high-risk because the life insurance death benefit payout will far exceed the amount paid in premiums before they pass.
While a life insurance company will still take on some high-risk policyholders, the premiums will be much higher, as you can see from the average life insurance rates displayed below.
Life Insurance Monthly Rates by Age, Gender, and Smoker Status
| Policyholder Age and Tobacco Use | Male | Female |
|---|---|---|
| 25-Year-Old Non-Smoker | $179 | $161 |
| 25-Year-Old Smoker | $322 | $249 |
| 35-Year-Old Non-Smoker | $166 | $179 |
| 35-Year-Old Smoker | $286 | $322 |
| 45-Year-Old Non-Smoker | $185 | $166 |
| 45-Year-Old Smoker | $360 | $286 |
| 55-Year-Old Non-Smoker | $240 | $185 |
| 55-Year-Old Smoker | $493 | $360 |
| 65-Year-Old Non-Smoker | $268 | $240 |
| 65-Year-Old Smoker | $638 | $493 |
| Average Monthly Rates for Non-Smokers | $407 | $268 |
| Average Monthly Rates for Smokers | $992 | $638 |
Smokers automatically have higher life insurance rates, as do older policyholders. If you are considered high-risk, check out our guide on life insurance for high-risk individuals.
Types of Life Insurance Policies
If you want a bigger life insurance death payout for your beneficiaries, you’ll have to pay a higher premium. The higher premium helps ensure the company remains profitable when paying out larger claims.
Term Life Insurance Average Monthly Rates by Policy Amount
| Policy Amount | Male | Female |
|---|---|---|
| $500,000 | $25 | $21 |
| $750,000 | $33 | $24 |
| $1 Million | $40 | $29 |
| $2 Million | $73 | $52 |
As you can see, the monthly premium doubles when you go from a $500,000 policy amount to a $2 million policy amount. Rates will also depend on whether you choose one of the types of term life insurance policies (which tend to be cheaper) or a whole life insurance policy.
The Bottom Line: How Life Insurance Companies Make Money
Life insurance companies pay out millions to billions each year in life insurance death benefit claims, but this doesn’t mean they still don’t turn a profit. Those hesitant to purchase a policy because they wonder how life insurance companies make money shouldn’t worry too much. Investments and lapsed policies help financially strong life insurance companies keep a steady revenue stream and stay profitable.
If you want to purchase a life insurance policy, enter your ZIP code into our free quote comparison tool to help you find an affordable life insurance policy.
Frequently Asked Questions
How do premiums and risk affect how life insurance companies make money?
Life insurance premiums consider how risky it is to insure a policyholder. Life insurance companies charge high-risk policyholders more so they can earn revenue if they have to pay out a claim sooner.
How does underwriting affect a life insurance company’s profitability?
Life insurance company profitability is based on the life insurance underwriting profit margin. A company must earn more in revenue than claim payouts to be profitable.
How do life insurance companies invest premiums?
Companies invest premiums in stocks, bonds, and other common investment opportunities to earn life insurance company revenue.
How much cash value do insurance companies keep compared to the amount they give to policyholders?
When you pass away, the life insurance cash value returns to the life insurance company, but the death benefit goes to your beneficiaries.
When would a life insurance company lose money on a policy?
Life insurance company revenue would be negatively affected if someone passed away before paying enough premiums to offset the death benefit payout cost.
What factors are more likely to contribute to higher life insurance rates?
Life insurance company business models consider risk, so factors contributing to higher life insurance rates include smoking and old age.
Do I get my money back at the end of a term life insurance policy?
You’ll only get life insurance premiums back if you signed up for a return of premium term life insurance policy.
If my whole life insurance policy lapses, do I get my money back?
No, you don’t get your money back, since letting your policy lapse due to non-payment or other issues violates term agreements.
Your life insurance quotes are always free.
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Benjamin Carr
Former State Farm Insurance Agent
Benjamin Carr worked as a licensed insurance agent at State Farm and Tennant Special Risk. He sold various lines of coverage and informed his clients about their life, health, property/casualty insurance needs. Assessing risks and helping people find the best coverage to suit their needs is a passion of his. He appreciates that insurance was designed to protect people, particularly during times...
Former State Farm Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about life insurance. Our goal is to be an objective, third-party resource for everything life insurance-related. We update our site regularly, and all content is reviewed by life insurance experts.
