How Insurance Companies Actually Make Money

You might be wondering: “If I can get $500,000 in life insurance for just $20/month, how do these companies make any money?”That’s a fair question — and the answer reveals why the entire insurance model exists, and how it’s designed to work for both you and the insurance company.

Here’s a breakdown of how insurance companies stay profitable, and how the insurance business model has been sustainable for centuries.

1 - Risk Pooling: The Power of Numbers

Insurance is built on the concept of risk sharing across large groups of people.

Insurers rely on actuarial science — sophisticated calculations that estimate:

• The probability of death at each age

• The average duration of a policy

• How large groups behave over time

For instance, a 30-year-old non-smoker has a very low chance of passing away in the next 20 years. If 100,000 people like that buy term life insurance, only a small fraction will result in claims. The rest of the premiums? Used to pay those claims, invested, or retained as profit.

2 - Investment Income: Premiums at Work

When you pay your premiums, the insurer doesn’t just keep that money in a vault. They invest it — often conservatively — in:

• Government and corporate bonds

• Real estate and infrastructure

• Dividend-paying equities

These investments generate steady returns, which:

• Help pay out future claims

• Keep premiums lower for everyone

• Provide long-term company profitability

3 - Lapse-Based Profits: When Policies Expire Unused

Here’s a surprising reality: most term life insurance policies don't need to pay out.

Why? Because:

• People cancel policies (or change jobs and lose their group term life policies)

• Some don’t renew

• Others don’t convert to permanent insurance

But the premiums already paid? The insurer keeps them — and no claim is made.

According to the Society of Actuaries, over 80% of term policies don’t result in a death claim.

4 - Underwriting: Precision in Pricing Risk

Before you ever get that $20/month quote, the insurer screens you. This includes:

• A medical questionnaire, possibly a physical

• A review of your lifestyle, occupation, and family history

If you’re healthy and low-risk, you get low premiums. If not, you pay more — or are declined.

This ensures insurers only take measured, profitable risks.

5 - Policy Design: Not All Coverage Is Equal

Term life is inexpensive — but temporary and often never used. Permanent life (like Whole or Universal Life):

• Costs more

• Offers lifetime coverage

• Includes cash value or investment components

This structure allows insurers to offer flexible options to clients — and balance risk across their entire portfolio.

Request a free consultation to set up the best insurance coverage that is guaranteed to work for you and your family.

Source: Canadian Institute of Actuaries, Manulife 2023 Annual Report, SOA Persistency Study