How Do Insurance Companies Make Money? : Insurance Answers

How Do Insurance Companies Make Money? : Insurance Answers

Hi i’m dave boike from retirement resources and today we’re going to talk about how do insurance companies make money well really boils down to numbers folks insurance companies came into existence many many years ago as people saw the need to ensure some type of risk whether it would be their farm if the farm burned down and they needed to rebuild it whether it would be

Benefits to a wife who lost her husband at war maybe it would be for a family that if the breadwinner passed away there would be money available to help get the kids through school and raised and possibly through college so what they what these companies did is they offered to first put together a a group or a pool of people let’s call it an association and basically they would bring these people together say a hundred people and

They would each pay in a certain amount of money obviously the older that they were and the closer they were to potentially using that benefit in other words dying the higher the premium would be the younger a person was theoretically the longer that person would have to pay into this pool and so their premium would be substantially different and much much less than the older person because

Chances are they were not going to pass away till much later in life these are all called mortality studies and and they have people at the companies that have been gathering this data and this information for years and decades and decades and so they’re getting pretty good with their numbers they know approximately out of any group of a hundred how many people are going to die at what specific age and they call those mortality studies

And so insurance companies bank on the fact that the people that become their clients and decide to join their association are going to stay healthy for many many years in fact outlive their mortality and that’s exactly what we’ve seen here in the last 10 years or so folks are living longer and longer due to modern medicine due to better advice from physicians and other health care practitioners people are living longer

For instance my grandmother lived to almost 101 my grandpa on the other side lived in 93. so those insurance companies had an opportunity to collect premiums many many many more years than normal say an average individual typically lives into their mid 70s maybe 78 the individual that lives to 80 or 90 of course that is more profit for the insurance company and then above and beyond that the insurance company takes

That money they invest some of it in very safe secure things like government bonds cds collaterally backed mortgages and they loan some money back out to the policyholders again thank you for spending time with us today i’m dave boike from retirement resources you

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