How Do These Life Insurance Companies Manage to Make Any Money?

By: Matt Rubin
At some point in your life you may have wondered how do these Life Insurance Companies make money? I mean, they charge like $25 a month to provide a 30 year old man a 10 year $1,000,000 term life policy and even if less than 1% of the policyholders die that still would be very difficult to pay out those claims. How do they make this work? Do they find ways to wiggle out of paying claims? Many have a suicide clause for the first two years of the policy, but in every other instance they are required to pay death benefits. Even if the insured was driving drunk and caused his/her own death the insurance carrier would have to pay out death benefits.
Even with the best underwriting it is possible for the insurance carrier to pay out death benefits equal to the premiums collected. Companies, therefore, have to rely on big gains from long term investments like commercial real estate, stocks, and bonds to achieve great profitability. Most Life Insurance companies only invest 20% of their holdings in the stock market. Liquidity is an important factor in their portfolio as well because they can never be sure how much of their assets may be needed to fund operational costs and death benefits. High grade corporate bonds and short term commercial real estate loans are an excellent source of income for these Companies. The time value of money is a principle that allows Carriers endless potential to grow their holdings.

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