Thursday, January 31, 2013

How does a life insurance company make profit?

Someone asked me, "How does a life insurance company make money after giving away high commission to the sales people?"

The simple answer is - by taking away a large part of the return that should go to the policyholder; leaving a poor return to the policyholder.

Take the example of a person who saves $6000 each year over 30 years. The total savings is $180,000. If the savings are invested to earn a yield of 5% per annum, the total accumulated amount would be $400,000. The investment gain is $220,000.

Now guess how much of the gain is given to the consumer? Typically, the consumer gets $80,000 and the insurance company takes away $140,000 to pay commission and other expenses and keep the rest as its profits.

A fair amount to be taken away to provide the insurance cover and the administrative services should be $60,000 and not $140,000. If the consumer decides to buy term insurance to provide the cover, the cost should be only $15,000.

Most consumers are not aware that they are offered a financial product that provides a poor return (about 2.5% per annum); as a large part of the potential gain is taken away as expenses and profit.

To learn how to make a better plan for your finances, attend the talks organised by FISCA ( Your future and your family's future depends on your taking this important step.


zhummmeng said...

The insurance companies use clients' money to invest, without which there is no profit. This is the reason why insurance companies are ONLY interested in pushing par products like wholelife and endowment. In order to rake this money they make use of greedy agents to con their clients into buying these products with cash value.
But the customers get miserable return from their money. Where does the rest go to? No secret!!! to pay the big salary of the CEO, the other senior managers and of course the greedy insurance salesmen.
What about buy term and invest the rest? This is required to be shared with the customers as alternative solution when the new insurance regime is implemented a few months from now.
But anyway, the new law provides for the direct channel to customers if they don't want to buy from insurance agents and pay a commission and also those customers who think they cannot get objective advice from the product pushing agents.This is the safeguard for consumers.
From now , consumers are advised not to buy from insurance agents but wait for the direct channel to be opened.

Xianlong said...

Personal finance not taught in schools. Ignorant people are needed to feed the corporations.

Is up to individual to self-educate.

Naval Goel said...

In my opinion they invest their money hold mortgages, stocks and bonds...nice intimation about insurance companies.

Niti said...

I liked the way You explained very briefly about the life insurance company profit
Compare life insurance Quotes

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