How do Insurance Companies Make Their Money?
Insurance companies use their investment income and premiums to pay for claims. They make money when the volume of premiums collected is greater than the amount paid out in claims. Insurance companies invest premium payments for extra income.
The video below contains more information about this topic. Please watch it! Here are two ways in which insurance companies make money:
1. The Float
The float is the cash value of policies that have been written but not yet paid out in claims. The length of time between when a policy is sold and when it might be paid out is known as the term. The longer the period, the larger the float will be for a company. Most insurance policies are written with a term of one year or less. Some life insurance policies may have terms of 20 years or more. Insurance companies earn interest on that money while they hold it before paying out on claims.
2. Investment Gains
In addition to interest earned on premiums held in the float, insurance companies also generate profits from investing those funds in securities such as bonds, stocks, mortgages, and real estate investments like commercial buildings and shopping malls. Contact home for more details.