Life insurance companies make money through a balancing act of strategically priced premiums and clever investment.

They invest the money you pay in life insurance premiums, in an attempt to make more than the value they'll have to pay out in claims.

In addition to this, life insurance companies make money through individuals paying for life insurance who outlive their policies or pay more into their cover than the amount paid out.

At Reassured, we offer an award-winning, fee-free broker service, comparing quotes to help secure the best deal.

Get in touch for a free quote today.

Keep reading to fully understand exactly how life insurance companies make money…

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Avoiding pay outs

It's often believed life insurance is a scam and that insurers make money by avoiding paying out.

In fact, contrary to this popular belief, 97% of all life insurance claims are successful[1].

If a pay out is denied it's usually due to one of the following reasons and is not an attempt to make a profit…

  • Non-disclosure - Failing to provide information or providing false information at the point of application
  • Missed payments - Leading to the expiration of cover
  • Outliving your policy term
  • Unsatisfied terms - Such as suicide clause or waiting periods or exclusions

Whilst a denied pay out is rare, it's always important to be open and honest when arranging your life insurance cover.

Therefore, if a claim is denied, it's not an attempt for life insurance companies to ‘make money’ and is certainly not their way of making a profit.

So how do life insurance providers make money?

Term-based premiums

Term-based life insurance lasts for a specified period of time.

If you pass away during the term of the policy, a pay out will be made to your loved ones, but outliving your cover will result in expiration of your policy and no pay out will be made.

When arranging cover, various information will be collected at application to assess your risk to the insurer and the likelihood of a claim being made.

This includes:

  • Your age
  • Your health
  • The amount of cover you require
  • The length of term
  • Smoking status

The less likely a pay out will be made, the more favourably your premium costs.

With regards to term-based cover, when a policyholder outlives their cover, no pay out will be made, therefore, meaning all money paid into the policy acts as profit to the insurer.

The good news is, at Reassured we can arrange term-based life insurance from just 20p-a-day and a cover period as long as 40 years.

How much life insurance do you need?

Enter your financial commitments to understand the level of cover you require.

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£121,687 is the estimated average outstanding mortgage per household in the UK.

Our property is generally the largest financial commitment any of us will make.

Your life insurance should cover this significant debt should you no longer be around.
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According to Money Advice Service, full-time childcare in the UK now costs £242 a week.

The loss of a parent could result in the need for additional childcare whilst the surviving parent increases their hours to account for lost income.

Your life insurance cover should factor in this additional required outgoing.
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The average level of debt (minus a mortgage) in the UK is £15,385.

Factoring in any outstanding debts in your name when arranging life insurance ensures this burden is not passed to loved ones.
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You may wish to leave your loved ones an inheritance or lump sum gift upon your passing.

Factoring in the gift amount when arranging your cover will ensure the pay out amount will be sufficient to provide your loved ones with this selfless gesture.
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According to SunLife, the average cost of a UK funeral is now £4,417, whilst the total cost of dying is £9,493.

This is a 130% increase over the past 16 years and shows no signs of slowing down.

A significant cost which should be factored into the amount of life insurance you secure.
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If you are one of the 65% of the UK who are lucky enough to have savings, this could be used as protection if you were to pass away.

Any pay outs from existing life insurance policies and investments can also be used as financial protection for your loved ones if you were no longer around.

Factor this into your required cover amount.
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Your total cover estimate

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Lifelong premiums

There are two types of life insurance policies which last for the rest of your life and therefore, a pay out will be made when you pass away, not if.

These include whole of life insurance which requires medical information and an over 50s plan which doesn’t.

With regards to lifelong cover, life insurance providers will make money by charging premiums with the likelihood of more money being paid into the policy than the overall pay out amount.

Due to the unknown risk associated with an over 50s plan, premiums tend to be significantly higher and available sum assured lower.

Whereas, whole of life cover offers a much higher sum assured for premiums based on your level of risk.

As a result, when arranging rest of life cover, it is essential to compare quotes to determine the best solution for you.

Clever investment of money

Alongside strategically priced premiums, life insurance providers will also invest a proportion of the money from monthly premiums into the stock market in an attempt to make further gains.

Any profit made from this investment is gained by the life insurance providers as profit.

Investments are carried out by highly trained individuals employed by the life insurance companies, either in-house or third-party.

Lapsed policies

Another way life insurance companies make money is through lapsed policies.

Many people take out life insurance but allow their policy to expire, not through reaching the term of their cover but through missing payments and never deciding to reinstate cover.

In this instance, life insurance companies receive months of premium payments without the need to ever make any death benefit payment.

A clever combination

As discussed, life insurance companies make money by a strategic combination of the above.

Of course, this is not a science, but years of analysis and clever mathematics allows life insurance providers to make informed decisions based on probabilities.

How do life insurance brokers make money?

Arranging your cover through a life insurance broker allows providers to reduce their marketing and overhead costs by gaining customers through a third-party.

In exchange, there are two models used by life insurance brokers.

Advised life insurance brokers will provide information and make suggestions as to which policy is best for the customer.

These brokers charge the customer for their services as a means of making a profit and usually charge a one-off fee or percentage of the overall policy amount.

Alternatively, a non-advised broker, such as Reassured, comes at no fee to the customer and simply collects a percentage of commission from the insurer they arrange the policy on behalf of.

Policies won't cost any more to the customer when arranged through a non-advised broker than they would if arranged directly.

Further benefits of arranging your cover through a broker include saving time and money by comparing quotes, reassurance all of your paperwork is completed accurately and that you receive all of the information you need to come to the most informed decision.

So why not make use of our award-winning services today and get your free quotes.

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Sources:

[1] https://www.abi.org.uk/news/news-articles/2021/05/record-amount-paid-out-to-help-families-cope-with-bereavement-ill-health-and-injury/

https://www.telegraph.co.uk/money/consumer-affairs/long-does-take-life-insurance-pay/

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