How Do Health Insurance Companies Make Money

Friday, July 20, 2012

How Do Health Insurance Companies Make Money


Image credit: fotomircea / 123RF Stock Photo 

How is it possible that health insurance companies turn a profit? After these companies pay medical expenses for their clients how do they have money left over? Some people say that these companies make money in the same way that casinos do. The reason these two business models have been compared is because risk is a very important factor in each of them. In case of insurance industry you never know if people will get sick or hurt in future. That's exactly why people pay for insurance in the first place because they know what is health insurance. 
 
Collect premiums 

Every kind of insurance company such as disability insurance, life insurance, car insurance, accidental death insurance, and health insurance companies make money by the monthly payments they receive from their clients every month. A single company can have thousands of people it insures, and it's possible that each of them could make a legitimate claim for help. That's the reason why an insurance company doesn't let anyone have an insurance policy

If someone gets sick often or has a pre-existing condition they'll definitely get rejected because the chances are just too high that the company will end up paying for their medical expenses in the near future. Out of the thousands that are insured only a much smaller number will ever make a claim on their insurance policy. As a client of the insurance companies you have to pay your premium every month to keep your policy valid. By insuring many, the company has lots of clients paying those premiums every month.

Invest

Health insurance companies will also make investments to turn extra profits. The government will typically make these companies keep a certain amount of cash ready for unexpected payments that need to be made. Since they have to set this money aside anyway the most intelligent thing to do with it is put it into some investments. 


They'll also take some of the money that they make from these monthly payments and put it into the stock market, let it make interest in the bank, and several other kinds of investments. Because on average the company makes money off someone for many years before having to actually pay out any insurance claims, they will have tons of time to make their investments.

Conclusion

The few ways that I've just mentioned are how insurance companies earn their money. Typically they won't be doing all these things at one time as its too stressful and requires too much manpower to have all these investments going at once, normally they only use one of these money making methods. But there are always exceptions and some companies are able to operate multiple investments at once. 

Since they are making profits from many different investments, staying in business is very easy. The people paying these premiums have the right to know where their money goes, and it's also interesting to learn how health insurance companies use the money they make to make even more money.

Author’s Bio:

Frank Lee is a regular writer for healthinsurancecompanies.com

5 comments:

Mick Jack said...

Many people state these businesses earn money just as which casinos perform. The main reason both of these company versions happen to be in comparison happens because danger is actually an essential element in all of them. In the event of insurance coverage business you won't ever understand in the event that individuals can get ill or even harm within long term.Malibu home insurance

sanam arzoo said...

Great information. Thanks for providing us such a useful information. Keep up the good work and continue providing us more quality information from time to time. Health insurance

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Webb Rowan said...

Health insurance companies make money by the monthly premiums received from their customers. They only need to spend money whenever their customers make medical claims, but these amounts are often covered back by subsequent premiums from other customers. They need to truly believe that the odds of their customers making claims are really low as opposed to the number of paying customers.

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