subject: How Do Life Insurance Companies Make Money? [print this page] How Do Life Insurance Companies Make Money?
Basically, life insurance companies act similar to gambling establishments. They offer you odds that are directly related to your gambling on your mortality. If you pay them enough in premiums before you die they will make a profit. However, if you pass on before they anticipate that people in your category will die, then they will lose money.In order to attempt to guarantee that they are profitable they will assess your risk factors. The more risk factors that you have that indicate that you will die prematurely, the more they will charge you for your premiums.A high risk candidate for life insurance has a greater likelihood of facing an untimely death than do other people of his or her gender and age category. These risks are assessed by using mortality tables. These tables assign the probability of an untimely death that is predicated on probabilities that are spread out through a large population.If your probability of meeting an untimely death is high then life insurance companies may even be reluctant to offer you an insurance policy at any price.Essentially a life insurance company will charge you enough money now in order to cover the future risk of your living to be one hundred years old. And they are masters in the art and science of projecting such outcomes on a very large scale.In order to make these assessments the life insurance companies hire teams of actuaries. Actuaries are skilled mathematicians who are strategic thinkers. They are often economists and statisticians who are extremely knowledgeable in both the theory as well as the application of probability and finances. Some actuaries are even employed to predict and prepare the companies they work for against major events so that they can mitigate these risks and stay profitable.Some of the more day-to-day risks that actuaries assess are related to the amount of alcohol that you consume, whether or not you are overweight, and if you have diabetes.For example, virtually all life insurance companies won't hesitate to increase your premiums if you drink heavily. According to some life insurance companies, if you consume two alcoholic beverages a day you may be disqualified from being in the preferred category. And, if you have more than three drinks a day you might even be disqualified from any standard life insurance rate.People who are overweight may pay up to four times more for their premiums than people who are thin.If a person has diabetes their chances of developing other medical conditions are increased. Consequently, if you are overweight or if you have diabetes, then your rates may be considerably higher. And some life insurance companies may be reluctant to offer you any insurance at all.
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