How Do Life Insurance Companies Make Money

Written by: Nik Ventouris

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Life insurance companies play a significant role in providing financial security for a plethora of individuals and families. 

In this How Do Life Insurance Companies Make Money article, we explore the business model that allows life insurance providers to generate revenue while at the same time offering essential protection to policyholders. 

We additionally discuss the key components that contribute to each company’s financial stability.

Tip: Doing a pre-licensing education course dramatically increases your chance of passing your exam on your first attempt, which can end up saving you both time and money in the long run.

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Can You Make Money Selling Life Insurance?

Yes, you can. 

Life insurance companies make money in a plethora of different ways. These include: 


Underwriting is the process by which life insurance companies assess the risk associated with insuring a potential policyholder.

This involves evaluating factors such as age, health, occupation, and lifestyle in order to determine the likelihood of a claim being made. Based on this assessment, each insurance agent/company will set a premium (i.e., the amount each policyholder pays to maintain coverage).

Life insurance companies make money through underwriting by charging premium payments that accurately reflect their level of risk. 

This is because — assuming that the insurer’s risk assessment is accurate — they will collect more in life insurance premiums than they pay out in claims, which will result in a profit. 

This is achieved through the use of actuarial science, a discipline that uses statistical analysis in order to predict the likelihood of specific future events, such as death, illness, and accidents.

Want to learn how to market your services as a life insurance agent? Have a look at our Insurance Agent Marketing overview.


Another key aspect of a life insurance company’s business model relates to investing the premiums collected from policyholders.

Insurers invest these funds in various financial instruments, such as stocks, bonds, and real estate. They do this with the goal of generating additional returns which will allow them to cover the cost of claims and/or other expenses.

The investment component of a life insurance company’s revenue is essential for long-term financial stability. By investing their insurance premiums, insurers can generate additional investment income, which can help offset the risk of unforeseen increases in claims or fluctuations in the financial markets.

Moreover, a well-managed investment portfolio can act as a “buffer” against inflation, which will contribute towards an insurer’s overall profitability.

Risk Management

Life insurance companies must employ effective risk management strategies in order to protect their financial stability and maintain profitability.

This includes diversifying their investment portfolios and ensuring that they maintain adequate reserves in order to cover unforeseen claims.

Diversification is a crucial aspect of risk management because it helps spread risk across a range of investments and asset classes. This reduces the potential impact of any single investment or market event on the insurer’s overall financial health.

Maintaining adequate reserves is another critical component of risk management. Insurers must hold a portion of their assets in liquid, low-risk investments to ensure they can quickly access funds (and pay claims) when needed.

Did you know? Regulatory bodies often set minimum reserve requirements in order to ensure the financial stability of insurance companies and protect policyholders.

How to Become a Life Insurance Agent

If you are not already a licensed agent, you will need to follow your state’s licensing protocols in order to become a life insurance agent and begin operating.

Even though the exact process can vary slightly from state to state (i.e., administering body, exam, etc.), there are a few steps that tend to be unanimous.

All in all, you will need to:

  • Complete Pre-License Education: This is actually a legal requirement in the vast majority of states. Even where this is not the case, we recommend completing an online course before you schedule your state exam to ensure that you are as prepared and comfortable as possible
  • Sit Your State’s Life Insurance Licensing Exam: Depending on your state, this could be administered by your Department of Insurance, Pearson VUE, Prometric, PSI, or a state University (i.e., Alabama). We recommend having a look at several content outlines before taking your exam
  • Complete a Background and Fingerprint Check: Before you file your application with your state, you will need to complete a background and/or fingerprint check. The cost for this can vary by state but is typically between $35 and $75
  • File an Official Licensing Application: This is often carried out via your state’s Department of Insurance, Corporation Commission, or Department of Financial Services, which will then redirect you to the National Insurance Producer Registry (NIPR). Keep in mind that you will need to pay a processing fee in order to file your application


Doing a pre-licensing education course dramatically increases your chance of passing your exam on your first attempt, which can end up saving you both time and money in the long run. For pre-licensing education, StateRequirement recommends:

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Alternatively, we recommend having a look at our state-specific How to Become a Life Insurance Agent overview for more information.

How Do Life Insurance Companies Make Money FAQ

How much money do life insurance companies make?

This will be different for each life insurance company. Having said that, it’s worth noting that the life insurance industry is growing, and — according to a report from the National Association of Insurance Commissioners — had a significant increase in annual net earnings to $31 billion in 2020.

Do life insurance companies “pay out”?

Generally speaking, yes. Companies will usually be legally required to pay the full face value of their term and permanent life insurance policies to the beneficiary (upon the policyholder’s death). This is known as a “death benefit”. Having said that, there are a few instances where the beneficiary will only receive a partial payout.

What is on the life insurance license exam?

This will depend on your state, as well as on whether you are taking an exam that contains more than one line (e.g., Life & Health, etc.). Having said that, most life insurance exams include the following topics: annuities, life insurance policy provisions, group contracts and underwriting, death benefits, tax-qualified retirement plans, and types of individual life insurance.

How do life insurance companies make money?

Life insurance companies make money in a variety of different ways, including via underwriting (i..e, term life insurance agreements, etc.) and making diversified investments. Investments made by a life insurance company can include stocks, bonds, or commercial real estate. See our How Do Life Insurance Companies Make Money article for more information.

How do I become a life insurance agent?

The process of becoming a life insurance agent can depend on your state, as there will be different requirements, exams, fees, and administering bodies in place. Having said that, you will generally need to purchase a pre-licensing education course, pass your state’s life insurance exam, complete a background check, and file an official application with your state’s Department of Insurance.

How can I pass the life insurance exam?

You can pass your state’s life insurance exam by ensuring that you allocate a sufficient amount of time to study during your preparation. We recommend having a look at your state’s content outline — which sets out exactly which topics you will be tested on — as well as purchasing a pre-licensing course; this can go a long way in helping you pass on your first attempt. See our How to Pass the Life Insurance Exam overview for more information.

How does life insurance work?

How your life insurance works will depend on the exact agreement that you have with your provider, as well as on whether you have a term or permanent life insurance policy. When it comes to permanent life insurance (i.e., universal and whole life), each policy will usually contain a cash value account within it which will offset the cost of insurance as you age.