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Originally Posted by MrSelfDestruct
Everyone dies. How do life insurance companies make money?
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There are two different life insurance products out there - whole life and term life. Term life is the simpler of the two. It has an effective date and an expiration date. Basically, the company is betting that you won't die between those two dates. They have actuarial data to back up all sort of contingencies, and the data you give them allows them to pigeonhole you as one specific type of individual. The longer the term and the older the buyer, the higher the premium. Obviously the limit does two. There's one other factor that is important too, and that brings us back to whole life.
Whole life insurance never expires. Basically it will pay out the benefit regardless of when you actually die. It typically costs much more than term (by a factor of about 10 for me, btw), but it has the benefit of never expiring. That said, the pay-in amount is still considerably less than the pay-out. You can also borrow against the payout amount after a certain point, and it can also be used as collateral for loans. It's counted as an asset tax-wise.
If the insurance company wins the "bet" with term coverage, then they obviously make money. However, they could lose it and still come out on top. They definitely do on whole life, although it seems like they don't. Insurance companies, whether they be life, health or property/casualty, take a generous portion of their premium dollars and invest them in a variety of things. Or, as in the case of Berkshire Hathaway, they're owned by parents who make very smart decisions. The funds that we're talking about are in the tens of billions for the larger ones, and they allow them to make huge dollars. It's why companies can afford to underwrite to loss ratios above 100% (in some cases). If they're making huge returns off their investments, those investments take primacy over the underwriting results and the underwriters are encouraged just to bring premium dollars in the door (almost) regardless of the risk. That's what's referred to as a soft market, which is what I'm mired in now.