How do insurance companies make profit?

Insurance companies build their business model, in other words, make money through underwriting and investment income. Underwriting revenues come from the cash collected on insurance policy premiums, minus money paid out on claims and for operating the business.

For instance, let's say ABC Insurance Corporation earned $5 million from the premiums paid out by customers for their policies in a year's time.

Let's also say that ABC Insurance Corp. paid $4 million in claims in the same year. That means on the underwriting side, ABC Insurance earned a profit of $1 million ($5 million minus $4 million = $1 million). Make no mistake, insurance company underwriters go to great lengths to make sure the financial math works in their favor.

The entire life insurance underwriting process is very thorough to ensure a potential customer actually qualifies for an insurance policy. The applicant is vetted thoroughly and key metrics like health, age, annual income, gender, and even credit history are measured, with the goal of landing at a premium cost level where the insurance company gains maximum advantage from a risk point of view.

Insurance companies also make a bundle of money via investment income. When an insurance customer pays their monthly premium, the insurance company takes the money and invests in the financial markets, to increase their revenues.

Since insurance companies don't have to put cash down to build a product, like an automaker or a cell phone company, there's more money to put into an insurer's investment portfolio and more profits to be made by insurance companies.

That's a great money-making proposition for insurance companies. An insurer gets the money up front from customers, in the form of policy payments. They may or may not have to pay off a claim on that policy, and they can put the money to work for them right away earning investment income on Wall Street.