How do insurance companies make money?

Insurance works in a very simple manner - members pay a fixed amount every month for coverage. In the event of an accident, your fixed amount of say $20 a month is put to good use when you are awarded a coverage of say $25,000. However, despite the disparity in the price you pay versus the price you get, insurance agencies and companies are still raking in big profits. Here''s how your $20 not only keeps you financially stable, but also makes insurance companies richer.

When members are low-risk

Imagine paying a $20 premium every month for a year, and you get an annual benefit limit of $10,000. Now, if there are many others who pay the monthly premium, there is certainly a bigger pool that will be formed. This pool is where your $10,000 limit is collected from, even if you just pay an average of $2,400 a year for insurance. However, not all those who pay get to use up their $10,000 limit because they did not get into any serious or costly accident or incident. If there is a remaining amount in the pool and the coverage year is at its end, this lump sum goes to the insurance company.

Insurance companies investing the premiums

Insurance companies also use the money members pay for their coverage and invest these in other deals. The interest keeps their coffers full while only a percentage is left for use for the benefit of the members. The more members a health insurance agency has, the larger its fund is. This is especially fruitful if there are many members paying the premium and there are only minimum or no risks involved at all.

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