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?

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  • John A
    Lv 5
    1 decade ago
    Favorite Answer

    Good question to ask, more people should be curious. Each product is priced differently.

    Whole Life insurance like all plans, is priced by actuarial accountants. These are the people that when you were in university were studying in the room next door while you were playing drinking games. They do calculations based on over a hundred years of mortality and morbidity rates to determine claims experience, cancellations etc. which allow them to build in a profit margin for all products.

    This particular product builds a cash reserve with all the premiums paid by all policy owners. It is sort of like a massive pension plan from which liabilities are paid (claims,admin costs, commissions, company profits) The residual is paid out to policyholders in dividends or cash value. So the answer is, don't worry the profits are priced in.

    In the real world this profit is magnified by two main things that very few people in and out of the financial industry are aware of:

    1) Life expectancy is always increasing so when you buy the policy at age 35, life expectancy is 82. By the time you get there it will be 88 so the insurance company will end up with 6 more years of premiums than they factored in.

    2) Cash values built up through dividends on whole life plans are very enticing to people who don't manage money well so one day when they glance at their statement and see thousands of dollars just sitting there teasing them, they can't resist cancelling the policy and buying that big screen TV they wanted. Bingo, liability ends for the insurance company, they keep all the premiums paid, pay out some of the interest and pocket the rest.

  • 5 years ago

    2

    Source(s): Paid Surveys At Home : http://onlinesurveys.iukiy.com/?OtnY
  • J
    Lv 4
    1 decade ago

    Insurance companies have math experts called Actuaries. They analyze life expectancies, company expenses, what the company earns on it's investments and lapse rates (people who drop their policies) and set the rates. They also won't issue a policy if you are in poor health.

    They are dealing with large numbers of insureds. So there may be a 100,000 people like your friend paying this premium each year and af few die and their beneficiaries get paid, some let the policy drop and the insurance company gets to keep/invest that money for future claims, and most live and keep paying. Remember life expectancy is getting longer so insuring a life is cheaper.

    They make money because they set the rates slightly higher than they need to cover the future claims.

  • Anonymous
    5 years ago

    1. It does not stay at $10 per month for 35 years. Either the insurance ends or the price goes up. If you live to 85, then either: a) you pay more than $10 per month in the later years (and more than $4200 total) or b) the insurance ends and you have no insurance when you get to 85, so they pay nothing when you die (but they still keep the money you paid earlier). Although it is definite that you will die, it is not definite (or likely) that you will still have the life insurance when you die. 2. They invest the money well. Each $1 that you put into the insurance now because several dollars that they have later to use to pay you when you die, because they earned money investing it.

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  • 1 decade ago

    SImply stated, they count on people not being able to afford the policy or losing sense of it's value and letting it lapse. Also as someone said they invest the money and collect interest for years. Another thing insurance companies do is take out reinsurance. They buy insurance to cover the insurance they have sold

    Source(s): Financial Rep
  • 5 years ago

    I recommend you to visit this website where you can get rates from the best companies: http://insurancecomparequotes.us/index.html?src=2Y...

    RE :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?

    Follow 4 answers

  • 1 decade ago

    Whenever you come across the term insurance whether it is a life insurance, vehicle insurance, realestate insurance, it means that somebody is there to take care of the risk of loss that you might face in future. Your future is unpredictible and anything might happen to you.

    Insurance companies runs well with a good volume of customer. For each insured they charge premiums depending upon their history. Say Met life has 20,000 customer locally and charges $300 per customer annyally. They make $ 6,000,000 annually (This is a straight calculation-a lot other thing are involved in this revenue like taxes) Say they have 5 customers who had suffered losses and insurance need to cover that so the insurance will pay 5*50,000= $2,50,000. So out of 6 million they suffer 2.5 million the rest 3.5 million is their profit. So the bottom line is premium is the key, they make a lot from little premium they charge with their millions customer.

    Any financial institution do not necessarily wait for their money and save it in thier lockers! They invest them in some other forms to generate more money. Money mobility is high once it goes out of your pocket.

    Source(s): Straight out of my brain.
  • The same way health insurance, homeowners insurance, and car insurance, VOLUME. A lot more people pay premiums than the insurance company pays in claims (usually). They also invest as previously noted. They have designated banks that hold their funds and they gain interest on these funds.

  • Bevan
    Lv 6
    4 years ago

    I recommend you to visit this web page where onel can compare rates from different companies: http://insurecomparequotes.us/index.html?src=5YAqq...

    RE :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?

    Follow 6 answers

    Source(s): I recommend you to visit this web page where onel can compare rates from different companies: http://insurecomparequotes.us/index.html?src=5YAqq...
  • 4 years ago

    1

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