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we all have been advised to buy insurance more than once For Life Health and even for buying a new car or starting a new business so let's suppose you buy a life insurance policy to provide a cash benefit to your family when you die but if every life insurance buyer eventually dies and their policy pays out how do insurers continue to turn multi-billion dollar profits each year and you may have heard this question before or have perhaps asked it to yourself how do insurance companies generate this much amount of money to pay as the claims moreover have you ever wondered how Insurance firms are able to use the best athletes in the world as spokesperson well you don't have to wonder anymore because we are here to explain how Insurance firms generate Revenue but first a little background information is set the stage an insurance policy is basically a commitment between you and the insurance provider that in exchange for an annual fee they would cover any insured losses you suffer the insurance policy itself is a contract or more like a promise between the insured you and the insurer insurance company seems like a pretty good investment option right you pay them money and they prevent you from losing anything in the future even better they can recommend the kind of coverage that best fits your way of life in simple words it's just a tool for transferring risk and the amount you pay for this Arrangement is referred to as the premium so how do insurance works the idea of insurance operates under the principle of risk pooling you must pay recurring payments as premiums toward the cost of the insurance if the covered event occurs and you file a claim the insurance company will use a pool of premiums paid by policyholders to cover your losses in case you don't make a claim during the specified policy period no benefits will be paid to you so that means you're transferring the risk of a financial loss you might experience due to Life's uncertainties to an insurance company in exchange for money for instance if you get into a car accident and need to go to the hospital the medical expenses associated with being hospitalized are covered by your health insurance in addition your auto insurance will cover the damages to your vehicle in the meantime your family will get a lump sum payment from your term insurance if you pass away in the accident however it's not as simple as it sounds in order to operate life insurance firms require a huge amount of working capital they literally have to hold on to most of the premiums they collect to ensure there is sufficient funding available in the event of a large claim situation moreover there's another catch as well let's say with most policies if you live long enough you will most likely spend more in Insurance than your benefit does in this situation what you're really paying for is the assurance that you will always be able to pay off your debts and take care of your family although your death benefit may be significantly more than the premiums you've paid if you pass away before your expected time of death and the insurance company suffers a large loss in this situation an example of this could be the 1998 ice storm that hit parts of Ontario Quebec and New Brunswick which resulted in approximately 700 000 claims for damage totaling 1.4 billion dollars and this makes us wonder how insurance companies become profitable as they are just like any other type of Enterprise and and to continue operating they must earn a profit and this question is quite understandable given that they are frequently issuing hundreds of thousands of dollars in benefits well the response can definitely take you by surprise but first let's have a look at the revenues of some of the top insurance companies of the world so coming back to your question insurance companies make their money using a lot of Highly complicated mathematics not through black magic or other Shady methods let's see how the main factor is underwriting profits like the majority of businesses insurance providers generally make money by selling to Consumers more specifically Insurance businesses offer insurance policies for sale and get paid in premiums by ensuring that the premiums received are higher than any claims made against the coverage insurance companies can make a profit and this is called underwriting profit the insurance company is able to estimate potential loss events and the likely amount of claims they will have to pay out in the future with a given level of certainty using historical data and statistical analysis Financial analysts are usually employed by Insurance firms to create simulations of the timing likelihood and cost of future claims hence insurance companies generate profits by ensuring that the amount paid out in claims does not exceed the amount collected in premiums moreover Insurance business invest a lot of time and money in researching mortality rates and the proportion of policies that are kept in effect until a death benefit is paid or the policy's terms expire so this is just some math but just selling life insurance is not the only reason why life insurance companies make as much money as they do when compared to most other business kinds insurance companies operate under a fairly distinctive business model where clients pay up front and services are may be provided afterwards this is called an inverted production cycle which means policyholders pay premiums up front and contractual payments are made only if and when an insured accident has happened the insurance firm uses this substantial sum of money and invested in things like money market funds bonds and real estate during the interval between collecting your premiums and paying out on your claim in fact investment income accounts for a sizable share of total revenues and profits for the life annuity Insurance business in 2020 generating 186 billion dollars in Revenue as opposed to 143.1 billion dollars from life insurance premiums and insurance companies are smart enough to know exactly how to invest that money for the best returns despite the fact that some of the gains from these Investments are utilized to lower policy rates or are given back to Holders of universal life insurance policies the majority of them are absorbed into the financial health of the insurance firms themselves in fact this investment income accounts for the great majority of the profits made by Insurance firms now the third factor is reinsurance reinsurance is the insurance that insurance firms purchase to safeguard themselves against disproportionate losses resulting from significant exposure it is essential to Insurance firms efforts to maintain their financial stability and prevent payout related default and Regulators require it for businesses of a specific size and kind this way the insurance providers also ensure their clients assurance that they would honor their claims and they can cover their costs both during prosperous and difficult economic periods an insurance company might for instance issue an excessive amount of hurricane Insurance based on forecasts that indicate a region has little risk of being hit by a storm significant losses for the insurance business may result if the hurricane did strike that area and without reinsurance taking some of the risks off the table insurance companies might go out of business whenever a natural disaster hits the last factor is life insurance cancellations lapses and term policies although the investment income from cash value policies is a significant source of income for life insurance companies the insurers can occasionally make money on expired term policies and lapsed policies this is due to the fact that after an insurance policy expires the insurance company is no longer obligated to pay the death benefit under that policy the most current statistics available from 2009 to 2013 showed that the overall yearly policy lapse rate was four percent so as you can see life Insurance firms actually have a very solid business strategy that benefits both the company and its clients this is why so many people still rely on life insurance providers to provide rewards to their beneficiaries in the event that they pass away hopefully this answers your question about how insurance companies generate Revenue you may also check out our channel for more informative videos and don't forget to subscribe to it thanks for watching