How Do Life Insurance Companies Make Money?

In this article...
  • Life insurance companies make money from monthly premiums and returns on investments, ensuring they are profitable and can fulfill obligations to customers.

little over half of Americans have some type of life insurance, which pays out a cash benefit when the insured person dies. This money provides financial security for the individual’s beneficiaries, such as their spouse and dependents, helping them cover funeral and living expenses that may otherwise be burdensome.  

Not every driver with auto insurance gets into a car accident, and not every home covered by renter’s or homeowner’s insurance experiences a covered loss, so it’s easy to see how insurers who provide this coverage make a profit. However, everyone with life insurance eventually dies. Despite this, life insurance companies are able to remain profitable and financially sound, ensuring they’re able to fulfill their financial obligations to their policyholders.  

How Do Life Insurance Companies Make Money? 

There are three factors that affect a life insurance company’s profitability, including how much it brings in from premiums, how many active policies it’s managing and how it invests its profits. 

Monthly Premiums 

Your monthly life insurance premium is based on myriad factors including your age, general health and lifestyle. Based on these and other variables, your life insurance company calculates how risky you are to insure. In other words, how likely you are to die during your policy term. Those who smoke, are obese or who have ongoing health conditions such as heart disease typically pay higher premiums than nonsmokers who are in generally good health. By calculating your unique risk, the life insurance company can ensure that it charges you a monthly premium that lets it make a profit and pay out if necessary. 

Inactive Policies 

Expiring policies and lapsed policies, or policies that individuals have stopped paying monthly premiums on, are also profitable for life insurance companies. With these policies, the company has received years or even decades of revenue but was never required to pay out death benefits on.  


The most significant source of profitability for a life insurance company comes not from customers’ premiums but from investments. In fact, in 2020, companies brought in $143.1 billion from premiums and $186 billion from investments. While insurance companies keep some of the proceeds from premiums to have available when a payout is necessary, it invests a large portion of its revenue in bonds, stocks and real estate.  

How Does Life Insurance Work? 

Life insurance is a contract between you and an insurance company that pays out a death benefit after you die. Purchasing a life insurance policy is one of the most effective, affordable ways to protect your loved ones’ financial security after you die. For example, your life insurance policy may help your spouse cover mortgage payments and everyday expenses, or it may provide your children with the funding they need for higher education. 

Every company has its own process for enrolling new policyholders. In general, you go through an application process in which you answer questions and possibly submit a medical exam. You have a range of coverage options available, letting you choose adequate coverage for your beneficiaries. Once your application is approved, you pay a monthly premium for the duration of your policy. If you die while your life insurance policy is active, your selected beneficiaries receive the cash payout. 

Do Life Insurance Policies Really Pay Out? 

Overall, life insurance companies have a payout rate of about 98%, meaning that if you die with an active policy in place, your beneficiaries can be reasonably confident that they’ll receive the benefit from your policy. There are a few things that can cause an insurer to deny a claim, however. An undisclosed health issue, for example, may void your policy. Many policies also exclude coverage for certain high-risk activities such as skydiving or spending time in a country where armed conflict is taking place. A policy may also be voided if the individual dies while participating in an illegal activity, and in some states, the company can deny a claim if the individual dies by suicide. 

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