Insurance Is Big Big Bucks
Last night we had dinner at Cindy’s with a fun couple from Longmeadow. They work in the insurance business, and I got a chance to find out some interesting things about this massively profitable enterprise.
When somebody signs up for a life insurance policy, for example, it only takes seven years to pay off the entire death benefit. So if you keep paying the premiums for 20 or 30 years, they make a fortune, if you die after only 10 years, they still make out fine.
The reason that insurance companies have so much money is that they keep the money in reserves to pay claims…so it becomes tax-free billions. The companies keep buying real estate and bonds, trying to do something with the piles of cash. The reason that GE and others have gotten into the insurance business is because of this incredible tax benefit…and that’s why Berkshire Hathaway is one of the richest companies, because of that tax benefit.
Insurance agents can make commissions of up to 140 percent of the value of the policy, that’s why so many people are interested in working in this business. You’d think that paying such huge commissions would be too costly….but again, just keeping those policies in force for seven or more years guarantees a profit over the long haul.
To pay the claims, the insurance companies rely on re-insurance companies, each of whom have to pay just about a fifth of the total claim. So they never have to take as big a hit, since they share the costs among the whole industry.
August 27, 2006 @ 8:52 pm
In 1968 just fresh out of the Army I got my life insurance license and went to work with New York Life selling Whole Life. I wanted to work in an industry that I could believe in and I had always believed in life insurance. I could earn a good living; people would be saving for retirement; I would be one of those people who are remembered for making a difference in peoples’ lives.It sounded good in principle but you have so eloquently stated the problem. Not only did the salesman take a commission from every premium paid but everyone in the office took a cut. And everyone higher in the multilayered sales structure took a cut.In less than a month I was so disillusioned that I quit. I couldn’t look people in the eye and tell them that this was the way to save for their retirement and protect their family’s future.I know the life insurance industry has changed since the ’60s but the more things change, the more they stay the same.