How life insurance companies make money comes down to pricing: they set premiums from the claims they expect to pay, what it costs to run the business and what they expect to earn on investments, and what is left over is the profit. A term policy only pays out if the person insured dies during the term, so the premiums of everyone covered fund the claims of those who do. If you would rather hear what a policy would cost you than read how insurers price one, a broker holding FCA authorisation phones at no cost once you tell us where to reach you in the form on this page.

What goes into a life insurance premium?

Royal London's plan details for its Personal Menu Plan (July 2025) show what one insurer weighs up. For its reviewable premiums, it says that when it first works out the amount it looks at factors such as "the future level of claims we expect to pay". The same list takes in:

  • what it pays to reinsurance companies, with whom it shares the costs of claims;
  • how many plan owners give up their plans early;
  • its own expenses, inflation and investment returns;
  • taxes, and the money it needs to hold as financial reserves.

So a premium is not simply a charge for the insurer's profit: it also rests on estimates of future claims and costs. Your answers on the application matter too: Aviva's policy summary (print reference DA03008) asks for complete, truthful and accurate answers and warns that otherwise it may amend or cancel the policy, reduce a claim or not pay it. When an insurer can refuse to pay is covered on its own page.

Premiums are not always fixed. Under that plan, guaranteed premiums stay the same unless the cover changes, while reviewable ones are looked at again after the first five years and every five years after that. At a review, "if their combined effect has been positive for us, we might be able to make your premiums cheaper"; if not, they can stay the same or rise. Why premiums rise with age is a separate question.

Why a term policy can pay for itself

Aviva's policy summary describes a term plan in one line: it "pays out if, during the policy term, you die or are diagnosed with a terminal illness that meets our definition". A policy that reaches the end of its term without a claim has therefore paid nothing out. The same summary says "The policy has no cash-in value at any time", and that if the payments stop, "you will no longer be covered (and we won't return any payments already made.)"

That is the balance in a term policy: a premium paid by everyone covered, and a lump sum paid on each valid claim. The sums are large: Aviva reported on 25 March 2026 that in 2025 it paid more than £860 million across 40,000 individual life insurance claims, a figure that includes over-50s plans and terminal illness payments, and premiums have to meet claims on that scale as well as running costs. How many claims UK insurers pay has the figures by insurer, and how term cover works covers the product itself.

Royal London does not carry every claim alone. Its list above includes the payments it makes to reinsurance companies, which share the costs of claims with it. Once you have sent the form, a broker phoning you at no charge can say whether a quote they find you has a guaranteed or a reviewable premium.

How whole of life cover uses investments

A term policy may never pay; a whole of life policy is designed to. Royal London's Whole Life Assurance "reminder of important facts" (print reference MKT2621_RL 04/2026) says such a policy "will pay out a lump sum benefit when the life covered dies". Because a payout is certain at some point, the money collected in the meantime matters. The document says Royal London invests the payments of its with-profits policyholders together in one fund, which holds UK and overseas shares, government and other bonds, property and cash.

Policyholders do not carry the whole investment risk. The same document says: "The value of the investments behind your policy may go up or down but we guarantee a minimum payout on the death of the life covered." Bonuses are the policyholder's share: "This is your share of the profits from the investment returns. There is no guarantee that we will add bonuses in any particular year." Surrendering the policy early returns a fair value based on the payments made plus the investment return achieved, less expenses, and that value may be lower than the amount guaranteed on death.

That wording is Royal London's, for its with-profits whole life policies; other whole of life products, including ones with a fixed premium and no bonuses, are set up differently. If you are weighing the two types, term against whole of life compares them.

How over-50s and funeral insurance plans balance out

Over-50s plans, sometimes sold as funeral insurance, have a fixed payout and payments that run for life or to a set age, so the arithmetic differs from term cover. Royal London's Over 50 Life Insurance terms and conditions show one version. Payments run monthly until the policy anniversary on or after the 95th birthday, or until death if that comes first, and the document warns: "Depending on how long you live, it’s possible you could end up paying more in total for your policy than it pays out when you die." It also says the payout does not increase over time and may be affected by inflation. How a plan like this would run at your age is a point for the broker to cover when they ring back.

The first year is treated differently. If you die in that year of something other than an accident, Royal London returns the payments made up to that point; an accidental death pays the full amount. After the first year, the full payout is made if all the monthly payments have been made. Other providers set their own qualifying periods and terms, so what over-50s cover costs and what funeral insurance is are better places to compare plans.

Who keeps the profit, and what keeps an insurer able to pay?

Where profit goes depends on who owns the insurer. Royal London's Over 50 terms say: "Royal London is a mutual insurance company, which means it is owned by some of its customers." Buying one of its Over 50 policies does not make you a member, the same terms add. Legal & General, a company with shareholders, spoke in its 2026 half-year results of delivering "strong and sustainable shareholder returns", alongside dividends and a share buyback.

Insurers do not set their own rules on holding enough money back to pay claims. The Bank of England says the Solvency II rules for insurance firms cover their financial resources, governance, risk management, supervision and public disclosure. The Prudential Regulation Authority's primary objectives include "promoting the safety and soundness of firms and contributing to the securing of an appropriate level of protection for policyholders".

If an insurer did fail, the Financial Services Compensation Scheme lists whole of life assurance among the claims it repays in full if the insolvency practitioner accepts them, and term life insurance as well for a firm that failed on or after 3 July 2015. Claims from before that date were 90% protected.

Frequently asked questions

How does a life insurer make money if everyone dies in the end?

A term policy only pays if the death falls within the term, and Aviva's summary says it has no cash-in value, so a policy that ends without a claim has paid nothing out. A whole of life policy does pay eventually, so the insurer prices it for that and, in Royal London's case, invests the payments in the meantime. Either way the premium is set from the claims expected, which is the Royal London factor quoted above.

Do insurers make money when people stop paying?

Royal London lists the number of plan owners who give up their plans early as one factor in setting premiums, and Aviva says that if payments stop, cover ends and payments already made are not returned. Whether that works out as a gain or a loss for an insurer depends on how many policies stop and when. What a lapsed policy means for you is on its own page.

How do life insurance companies invest their money?

Royal London says its with-profits fund for whole life holds UK and overseas shares, government and other bonds, property, cash and other investments, spread so there is less risk to the fund's value than investing mainly in one type of asset. Other insurers invest differently and describe it in their own documents.

Why are some life insurance premiums reviewed?

Royal London's reviewable premiums are unchanged for the first five years, then reviewed on the fifth anniversary and every five years after that. It says premiums could go up or down after each review, depending on a number of factors. Guaranteed premiums, it says, stay the same unless the cover changes.

Pricing for term, whole of life or over-50s cover is something the broker can cover in one call, and the short form here takes only a few minutes.

Sources

  • Royal London, Personal Menu Plan Life or Critical Illness Cover, Plan details (July 2025), read 26 October 2026. adviser.royallondon.com
  • Aviva Life & Pensions UK Limited, Life Insurance Plan Policy Summary (print reference DA03008), read 26 October 2026. static.aviva.io
  • Aviva, Aviva paid nearly £2 billion in protection claims in 2025 (25 March 2026), read 26 October 2026. aviva.com
  • Royal London, Whole Life Assurance: Reminder of important facts (print reference MKT2621_RL 04/2026), read 19 October 2026. royallondon.com
  • Royal London, Over 50 Life Insurance Terms & Conditions, read 27 October 2026. royallondon.com
  • Legal & General Group, 2026 Half Year Results (5 August 2026), read 1 November 2026. group.legalandgeneral.com
  • Bank of England, Solvency II (last updated 28 August 2026), read 1 November 2026. bankofengland.co.uk
  • Financial Services Compensation Scheme, Insurance protection & compensation, read 27 October 2026. fscs.org.uk