We all know that life insurance is crucial nowadays. As the people are falling prey to life-threatening diseases and several road accidents, life insurance is the only thing that takes care of the family of the deceased.
In case of unfortunate demise of the insured person, the life insurance companies pay the sum assured to the nominees or beneficiaries. Isn’t it interesting that the premium for the policy is almost 1/10th of the sum assured, and still companies afford to pay the full amount to the beneficiaries? Yes, there you are. In short, how life insurance companies work and make money, right? Here is your answer.
Analytical Aspects and Premiums
When applicants submit the necessary documents and the medical reports to life insurance companies, the experts analyze all the data and check whether they would face any situation to pay the sum assured or not.
The premium amount is fixed by analysing several aspects such as the age of the applicant, any disease/disability he holds, any dangerous habit he possesses and so on. The premium is lesser for the youngsters and increases along with age.
If the applicant is healthy enough and doesn’t seem to be exposed to any diseases, the premium amount is offered comparatively low. However, if medical reports show any potential threats, the underwriters determine the exact premium amount.
Insurance underwriters are nothing but the subject experts that analyse the risks of the applicant and determines various fees such as premiums, additional charges, pay-outs etc.
A simple calculation for determining the profits is based on the ratio of the premium collection to the claims made in that particular fiscal year. If any insurance company receives Rs.10 million as premium collection and settles the pay-outs of Rs.5 million; undoubtedly the remaining amount of Rs.5 million is profit.
Term Insurance – A Cash Cow
Term insurance products stand to be a cash-cow for life insurance companies. Term plans are easy to understand, and even the buying process is very simple. It merely provides death benefits to the beneficiaries in case of the demise of the life insured. If he survives, the tenure, no maturity/survival benefit is paid.
This is where life insurance companies make a profit. Term plans are availed mostly by the young working individuals, who are less likely to meet uncertain death. Even if the individual possesses any dangerous hobbies or smoking/drinking/drug inhaling habits, the premiums are determined accordingly. According to the experts, term insurance claims are seen even less than 5% of the overall policies sold.
Annulled Cash Value Pay-outs
When people invest in the plans like ULIPs and see nothing happening with their funds, most of them turn into withdrawing the policy. Here, the liability towards the policyholder gets over; furthermore, life insurance companies also make money by levying some fees.
When an insurance policy is purchased, the entire amount of the premium is not used for the life coverage. A part of it is redirected towards the market investments (obviously the life insurance companies have a team of investment experts too), and the corpus is gained.
By understanding all the facts, we hope you must have realised how it is affordable for the life insurance companies to sustain even after settling claims. Rest, the experts take care of all the technical aspects of the insurance policies.