How does the Life Insurance Industry Work?

If you have wondered how the life insurance industry works or how life insurance companies make money, you might be surprised to learn that the concept is multi-faceted. Life insurance is both very simple and very complicated at the same time.

Life Insurance Basics

At its simplest form, life insurance providers have a pretty good idea how long certain groups of people will live, and collect premium payments from policyholders based on many factors that serve as indicators of how long the insured person might live. Insurance companies charge lower premiums for people they believe will live longer and higher premiums for policyholders they believe are at greater risk of dying at a younger age.

While the insurance companies are collecting premiums from policyholders, the companies invest the money collected in various securities to earn a profit. If a policyholder maintains a life insurance policy for enough years, the insurance company earns a profit even after it has paid out the face value of the insurance policy to the policyholder’s beneficiary.

Life insurance improve their chances of paying out claims later rather than sooner with the help of statisticians that are good at determining various risk factors and how they affect the length of time a person may live. The insurance companies also implement underwriting guidelines to help weed out and refuse coverage to groups of people considered to be at high risk for not living as long as healthier groups of people. This helps the insurance company avoid paying out claims before the insurance company has had a chance to earn investment profits on premiums received.

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