Life insurance companies make money on life insurance policies in four main ways: charging premiums, investing those premiums, gaining interest from cash value investments, and benefiting from lapsed policies.
1. Charging premiums
Paying your policy premiums keeps your policy active, so that your beneficiaries get the death benefit.
Premiums are carefully calculated by your insurer to cover your death benefit and provide profits to the company. Based on the length of your policy’s coverage and your estimated life expectancy, your premiums fund:
Your policy’s death benefit
The cost of administering your policy
Profit for the insurance company
If too many customers die sooner than expected and the insurer needs to pay out more claims than planned, the insurer loses money.This is why the life insurance application process is so thorough, and why there are harsh penalties for concealing information on your application in an effort to lower your rates.
2. Investing premiums
As policyholders pay their premiums, the insurer invests a portion of those payments. The insurer sets aside enough cash to pay out claims in case of a market downturn and keeps any interest gained.
3. Gaining from cash value investing
Insurance companies have an additional investment stream that comes from servicing permanent life insurance policies. Premiums for these policies are many times more expensive than premiums for other types of coverage, such as term life insurance.
This is partially because permanent life insurance premiums fund both the death benefit and an investment-like cash value feature.
The cash value funds go into a larger pool of investments managed by the insurer, and some of the earnings stay with the company.
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4. Benefiting from policy lapses and expirations
Finally, there are some insurance policies that go unclaimed, which can happen especially with term life insurance, if the policyholder outlives the term. Term life insurance is only meant to last until the insured person no longer has dependents or debts to cover with their policy — usually between 10 and 30 years.
An expired term life policy is ideal for an insurance company because it means it has collected decades of premiums without paying out any claims.
On the other hand, permanent policies, which come with high premiums, are often surrendered or lapse when owners can’t keep up with the payments.
While a policy lapse or surrender means the insurer is no longer liable for the payout on the policy, it also loses premiums that could have been invested. Most insurers charge surrender fees to recoup some of that lost revenue.
→ Learn more about how to buy life insurance
How does the insurer’s profits affect your life insurance policy?
As long as your insurance company stays profitable, how the company makes a profit is unlikely to have a noticeable effect on your life insurance policy.
If you own a policy with cash value, you may see additional gains based on your insurer’s investments, while the guaranteed minimum interest should keep you from losing money.
Your insurance company turns a profit through premiums and investments, but it’s in an insurer’s interest to keep premiums affordable to keep your business. And if your insurance company has strong finances, it can ensure that your policy pays out to your loved ones when you’re gone.
→ Learn more about how to understand your life insurance policy
More about the life insurance application process
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What is the MIB?
Why does a life insurer need an attending physician statement (APS)?
Should you backdate your life insurance policy?
What do I do if my life insurance application is declined?
What is a modified life insurance offer or approved other than applied?
How to pay for life insurance
Does your credit score affect your life insurance premiums?
How to lower the cost of your life insurance premiums
What is the waiting period for life insurance?
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What happens if you lie on your life insurance application
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How to buy additional life insurance
What does a life insurance agent do?
Frequently asked questions
How do life insurance companies make a profit?
Life insurance companies make a profit on the premiums they charge for policies. Companies invest part of those premium payments for additional gains.
Do companies ever lose money on life insurance policies?
An insurer can lose money on a policy if a policy owner dies earlier than predicted or gives up their policy before the end of the term.
How does the way your insurance company makes money affect your policy?
Your policy generally won’t be impacted by how your insurer makes money. Working with a financially stable insurance company can give you peace of mind that your policy’s death benefit will pay out.
Authors
Editor & Licensed Life Insurance Agent
Katherine Murbach is an editor and a former licensed life insurance agent at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.
Contributing Editor
Julia Kagan is a contributing editor at Policygenius, where she specializes in life insurance. Previously, Julia was the senior personal finance editor at Investopedia for nearly a decade, a vice president and editorial director at Consumer Reports, the editor of Psychology Today, and the vice president of content at Zagat Surveys.
Editor
Associate Content Director
Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.
Expert reviewer
Certified Financial Planner
Ian Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.
Questions about this page? Email us ateditorial@policygenius.com.
