How can life insurance companies pay out millions of dollars each year without going broke?
Typically, in the US at least, the SCC State Corporation Commission (or other such agency) requires that an insurance company have “X” amount of dollars in reserve to pay out on claims as a safeguard. Naturally, this does not always work. The best example I can think of is when Hurricane Andrew swept through Florida and several smaller insurance companies became insolvent because there were so many claims. A lot of which were total losses on cars/property. The reserve amount just didn’t cut it because of the magnitude of the event. Theoretically, the same could happen to a life insurance company if a number of policy holders were involved in a mass disaster (like the recent tsunami). Premiums are collected on policies and usually invested and/or held back in a reserve fund. Typically a policy holder will pay their premium for several years before a claim is made. They can pay out millions because they have collected enough in premium payments from everyone to do so. Let’s say 1,000,000
