How does insurance make money?

If an insurance company is making money, then it must be ripping you off, right? Well, not really. Insurance companies have to make money. That's why they are in business. Remember, the point of insurance is to cover a major loss. You hope you never have to use it. Also, many insurance companies don't make their profits off of your premium, but investments. Insurance companies collect premiums from hundreds of thousands of customers. They then pay out benefits to those customers you make claims. If they collect more premium than they make payments, then they make what is called an underwriting profit. Some insurance companies manage an underwriting profit, some don't. Many insurance companies make their profit on what is called the float. This means that they invest the premiums they collect. Since, with some types of insurance, premiums are typically collected many years before they have to pay out benefits, the insurance company can have ample time to make significant investment returns on the premium money. If the insurance company is good at investing, this can be where they make the majority of their profit.