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How Do Life Insurance Companies Make Money?

June 12, 2023
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

Life insurance policies provide hundreds of thousands or even millions of dollars in coverage for countless individuals.

How do life insurance companies make money if they’re constantly paying enormous death benefits? Primarily, their revenue comes from premiums, investments, and lapsed policies.

In this article, we’ll explore how life insurance policies work, how your premiums are used, and how life insurance companies remain profitable.

How Life Insurance Works

The main reason to buy life insurance is financial protection for loved ones. The basic purpose of life insurance is to replace your income if you die unexpectedly.

The parties involved in a life insurance policy:

  • Policy owner: The person or entity that owns the life insurance contract. They pay the premiums and have control over the policy.
  • Insured: The person whose life is insured by the life insurance contract. They go through underwriting, which determines the policy’s cost.
  • Beneficiary: This person, or persons, receive a death benefit payout if the insured dies while the policy is active.

Life insurance can be customized to fit your needs. You choose how much to buy and how long the coverage lasts.

Components of a policy:

  • Face amount (death benefit): This is the total sum the insurance company agrees to pay the beneficiaries upon the insured’s death.
  • Coverage duration: The amount of time the policy is active. For term life coverage, lengths range from 10-40 years. All permanent life options offer lifelong coverage.

Policy Types

There are two broad types of life insurance: 

  • Term life insurance: Provides coverage for a specified period (term), offering a death benefit if the insured passes away within that term. It does not accumulate cash value.
  • Permanent life insurance: Offers lifelong coverage and a cash value component that grows over time.

Unsure which is best for you? Explore the differences between and details of term and permanent policies

The Life Insurance Business Model

Life insurance companies are in the business of financial protection and risk management. Here’s an overview of the life insurance business model to better understand how life insurance companies make money:

  1. Life insurance companies offer a range of policies to individuals and businesses. These policies provide financial coverage and benefits in the event of the insured person’s death.
  2. Life insurance companies assess the risks associated with insuring individuals or groups. They evaluate factors such as mortality rates, health conditions, lifestyle choices, and other relevant information to determine the insurability of applicants and set appropriate premium rates.
  3. In exchange for the coverage, premiums are collected from policyholders.
  4. Insurers invest premiums to generate income and mitigate risk.
  5. If/when the insured person passes away, the life insurance company pays out the agreed-upon death benefit to the beneficiaries named in the policy.

Life insurance companies provide individuals and businesses with the peace of mind of financial protection and help mitigate risks associated with life events. But they must make a profit to uphold their promises to policyholders.

See what you’d pay for life insurance

Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.

Generating Revenue Through Premiums

Life insurance is a contract in which a policyholder agrees to regular premium payments, and the insurance company promises to pay a death benefit if the insured dies while the policy is active.

Insurance companies invest the premium payments. They have professional investment teams that manage these funds, aiming to maximize returns while maintaining an acceptable level of risk.

  • Common investment vehicles include stocks, bonds, real estate, and other financial instruments.
  • The investment income helps supplement the revenue generated from premiums.


Underwriting is the process insurers use to evaluate the risk each applicant poses and set premiums accordingly. For example, a 30-year-old male who smokes will pay more than a 30-year-old male who is tobacco-free, all other factors equal. This is because there is a mortality risk associated with smoking cigarettes.

They set premiums at a level that sufficiently covers anticipated claim payouts and related costs while allowing for profitability. If their underwriting process succeeds, the company can profit from the premiums collected after accounting for claims and operational expenses.

Policy Lapses

If you stop paying premiums on your policy, it lapses and terminates. When this occurs, you don’t get a refund or a payout. The insurance company makes a profit in these situations.


If you surrender a life insurance policy, the insurer pays you the policy’s cash value, if any, minus surrender charges. (Term life insurance policies don’t have cash value, so you would receive nothing.) If you surrender a permanent policy early on, the cash value may be less than what you’ve paid in premiums. In this case, the insurance company makes a profit.

Term Life Insurance

Term life insurance only pays out a death benefit if you die while the policy is inforce, which is just one reason why it’s more affordable than permanent life insurance. Families buy this insurance to protect their loved ones against the “what-ifs.” If the insured outlives the policy, no death benefit is paid, and the insurance company profits.

Managing Risk and Expenses

Because life insurance companies pay out substantial amounts to beneficiaries, they must make smart financial decisions to stay in business. They manage risk and expenses through various strategies, such as:

  • Underwriting: This process is based on actuarial science, which uses statistics, math, and finance to quantify insurance-related risks. Actuaries analyze factors such as mortality rates, policyholder behavior, and market trends to estimate the likelihood of claims and determine appropriate premium rates. Underwriters use these insights to assign rate classes, which determines the premium.
  • Diversification: Insurers issue policies to a wide range of people. This spreads risk among a diverse group, reducing any single claim’s impact.
  • Reinsurance: Insurers transfer a portion of their risk to reinsurers. Reinsurers provide insurance to insurance companies. They help manage the insurance company’s exposure to considerable losses. For example, a natural disaster could claim the lives of many insured people. Such an event could bankrupt an insurance company if they didn’t spread their risk out.
  • Investments: Premiums don’t sit in a checking account at the insurance company headquarters. Instead, insurers invest these dollars to generate returns.

How Can You Be Sure Your Insurance Company Is Financially Stable?

An insurance company’s financial strength matters because it proves it can pay claims. Independent rating agencies, such as Standard & Poor’s, Moody’s, and A.M. Best, evaluate insurers in areas of profitability, debt, and liquidity.

These reports are public and you can access this information online to learn more about an insurance company’s financial strength. Here at Quotacy, we only work with A-rated insurers, so you can rest assured that the company you choose is financially stable.

Compare Quotes From the Nation’s Top Carriers

If you’re under 35 and in great health, you’ll likely get approved for coverage at a low rate.

If you have health conditions or regularly participate in risky activities, explore which carriers underwrite your risk factors most favorably– they evaluate risk factors differently.

Knowing the best carrier for your specific needs may seem overwhelming, but we make it easy by shopping on your behalf. When you apply through Quotacy, our licensed agents and in-house underwriting team will review your application, ensuring you’re matched with the most suitable life insurance company.

If we find an insurer that offers better pricing or terms than your initial choice, we’ll let you know. The choice of insurer is up to you, but our job is to make sure you know your options.

Start by getting free, anonymous term life insurance quotes. See estimated pricing from top-rated insurers instantly without even providing any contact information.


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