Burial Insurance: How Do Insurance Companies Make Money?

Burial insurance is one of those insurance products that can be confusing if you do not understand how insurance works. One of the biggest areas of confusion is one of how insurance companies make money from a product that is virtually guaranteed to pay out. In other words, it is possible for a consumer to pay into car insurance for decades without ever making a claim. His/her insurance company would make out very well in such a case. Nevertheless, a burial insurance policy will almost always pay, so the insurance company has to make money some other way.

Regardless of the type of insurance you are talking about, all insurance products have one thing in common: they work as investments for the companies offering them. To be clear, an insurance company is nothing more than a financial institution that uses the money from its customers to earn a profit. Allow us to explain.

Investing Your Premiums

In order to make insurance attractive to consumers, insurance companies must offer their customers the possibility of getting more at the time of claim than they have put into the policy through premium payments. Nonetheless, no insurance company could afford to stay in business if they did not earn enough money to make up that difference. They have to make more than they pay out in order to continue thriving. This is accomplished through investments.

In short, insurance companies take the money they receive in premium payments and turnaround and invest it. Federal and state laws require insurance companies to hold onto a certain amount of cash in order to pay claims; the remainder of that cash can be invested in any number of different opportunities.

As an example, an insurance company might put a significant amount of its money into corporate or government bonds. Bonds are considered very safe investments because returns are pretty much guaranteed. However, bonds do not tend to earn very much. Where greater returns are desired, an insurance company might put some of its money into a capital growth equity investment fund. These are investment funds that use money to purchase companies, develop them, and then resell them for a profit down the road.

The Risk Factor

What makes the insurance business so interesting is the risk factor. When you purchase burial insurance, you are signing a contract with your insurance company that entails risk on both sides. You are taking the risk of paying for the full value of your policy without getting anything in return, in the event you outlive your policy. Your insurance company is taking a risk that you will die before they have enough money to both pay your policy and make some profit.

Along with the risk is the inverse possibility of significant benefit. Beginning with the consumer once again, he/she (or his/her beneficiaries, more specifically) will benefit substantially should he/she die before paying enough in premiums to cover the face value of his/her insurance. The insurance company benefits if the policyholder either pays the full face value or outlives the policy altogether.

It is this idea of risk versus reward that drives the insurance industry and its various products in every form. Make no mistake about it however; the insurance industry has done the math. They know how to write policies that will enable them to make a profit while still meeting the needs of their customers.

So, should you consider purchasing burial insurance? Perhaps. Burial insurance is one option for covering your funeral and burial expenses in the absence of term or whole life. However, there are some who purchase it despite having regular life insurance. It all comes down to your current financial position, expectations of your financial future, and your goals for passing on an estate to your survivors.

Source:

• Burial Security - http://burialsecurity.com/