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Key Takeaways
- Life insurance companies make money through premiums, investments of cash value accounts, fees, reinsurance and surrender charges/lapsed policies.
- Companies set premiums based on the expected rate of death claims, the expected investment earnings and their operating costs.
- Factors that affect profits include underwriting performance, investment performance, overhead expenses, taxes and dividend payouts.
Overall, life insurance companies make money from the difference between their premiums paid out and the investments they earn, minus their claims paid, reserves increases, expenses and capital costs.
A life insurance premium is what the insured pays for their policy to stay in force. Insurance companies base premiums based on three different components:
- Mortality: This is the expected rate of death claims. Insurers use mortality tables, taking into account the insured’s age, smoker status, gender and other factors, to predict how likely it is that they will die within each future year of the policy.
- Interest: The interest is how much the insurance company expects to earn when they invest the premiums of permanent life insurance policies. In contrast to term policies, permanent policies have a cash value component that earns either a fixed or variable rate of interest.
- Expense: Expenses are an insurer’s operating costs, including how much its agents make when they sell policies. This takes into account their commissions, taxes, underwriting and administrative expenses and other forms of overhead.
Investments
With permanent life insurance policies like whole or universal life, companies invest premiums in mortgages, stocks, bonds and other assets. With whole life policies, for example, which have cash value components that earn a fixed rate of interest annually, insurance companies will profit if they earn more in their assets than the interest rate.
Lapsed and Surrendered Policies
If a term life insurance policy lapses and the insured is still alive, the insurer does not have to return their premiums and can simply pocket them as profit without paying out a death benefit to the beneficiaries. If the insured surrenders a permanent life insurance policy, the insurance company owes them the cash value. However, the surrender fees may be higher than the policy’s cash value, depending on how long the policy was enforced and how much the cash value component accumulated.
Fees
Universal life insurance and any other investment-linked life insurance product have fees including:
- Administrative fees
- Rider fees
- Asset management fees
- Advisory service fees
Reinsurance
Reinsurance is an insurance policy that an insurance company buys for itself. In other words, insurance companies buy insurance to protect themselves against unforeseen or extraordinary losses, extreme mortality risks like catastrophes. If catastrophes occur, the insurance companies will receive a benefit.
There are three sectors of the insurance industry:
- Property and casualty: This type of insurance includes auto insurance homeowners insurance, and commercial insurance.
- Life and annuity
- Health: Note that property and casualty plus life and annuity companies can write health coverage, as well.
The following companies assess the financial strength of insurance companies:
- AM Best
- Fitch
- Kroll Bond Rating Agency
- Moody’s
- Standard & Poors
To determine the financial strength of a company, check the ratings of at least two of the above agencies. Make sure to check their ratings codes to see their highest rating.
- Underwriting performance: How much an insurance claims vs. what it earns in premiums
- Investment performance: How much the insurer earned on their investment portfolio
- Overhead expenses
- Taxes
- Dividend payouts
How much a $100,000 life insurance policy pays out depends on your health status and age, but typically, it can be anywhere from 2% to 4% of the policy’s age. Look at your most recent statement or ask your insurance agent to check the policy’s cash value.
Assuming you have a term life insurance policy and you are alive at the end of the policy term, your policy will lapse and your beneficiaries will not receive a death benefit.
The best age to get life insurance is as young as possible, as you can get lower premiums the younger you are. However, there’s no universal “best age” to get life insurance. Rather, you may want to get it in conjunction with certain life events, like getting married or having a child.
The downsides of whole life insurance include:
- Higher premiums compared to term life insurance
- If you withdraw money or don’t repay a loan you took from the cash value, the death benefit will be reduced
- Not as much potential for cash value accumulation as with variable universal life or other types of investments
- Inflexible premiums/death benefit
Yes, life insurance companies can profit, but not every company is profitable every year. According to the National Association of Insurance Commissioners’ mid-year 2025 U.S. Life and A&H Insurance Industry Analysis Report, the life insurance industry had 29% more net income in the first six months of 2025 versus the first six months of 2024.
Overalll, the industry had $22 billion of net income in the first half of 2025.
