Maximizing Your Insurance: Tips, Savings, and Claims Explained

Published Date: 07/09/2024

Do Insurance Companies Really Make Money by Denying Claims?

And Why Some Parents Buy Life Insurance for Their Babies

Insurance is often described as a promise — a contract that exists to protect you when life goes wrong. But for many consumers, that promise comes with skepticism.

Do insurance companies actually make money by not paying claims? And if so, how can consumers trust that their insurer will do the right thing when disaster strikes?

In a recent Insurance Hour episode, host and industry expert Karl Susman tackled these challenging questions head-on. The discussion, sparked by real listener emails, dove into some of the most misunderstood — and emotionally charged — aspects of the insurance business.

What followed was a thoughtful breakdown of how insurance companies really operate, why not every claim can or should be paid, and even why some parents choose to buy life insurance for newborns.

The Question: Do Insurers Profit from Denying Claims?

One listener asked bluntly:

“Insurance companies make money by not paying claims. How is that not a conflict of interest?”

It’s a fair question — one that touches on the deep mistrust many people feel toward insurers, especially after hearing horror stories about denied claims or delayed payouts.

Susman began by acknowledging the logic behind the question:

“In a vacuum, if you had two identical insurance companies with the same policy, same client, and same claim — and one company didn’t pay while the other did — then yes, the one that didn’t pay would have less expense and therefore more profit.”

However, that logic only applies if the claim was legitimate and the company intentionally refused to pay it.

In reality, insurance is not an arbitrary process of paying or not paying — it’s governed by contracts, regulations, and actuarial principles.

Insurance Is a Contract — Not a Favor

When you buy an insurance policy, you’re entering into a legally binding agreement.

“The contract you purchase from an insurance company is a legally binding document,” Susman explained. “It’s a promise between you and the insurance company: you pay premiums, and in exchange, they promise to pay for a covered claim.”

That agreement is built on a principle known as “utmost good faith.”

This means both parties — the insurer and the insured — are expected to act honestly and transparently. The consumer must disclose accurate information about their property, health, or driving record, while the insurer must evaluate claims fairly based on the terms of the contract.

When both parties follow this principle, the system works. But when either side bends the truth — whether through exaggeration, omission, or outright fraud — the system begins to break down.

“Insurance carriers must operate with the utmost good faith,” Susman said. “That means giving everyone the benefit of the doubt. But it also means following the exact policy language — not just the ‘spirit’ of it.”

The Gray Area: Where Disputes Arise

The problem, Susman explained, often comes down to gray areas — situations that aren’t clearly covered or excluded by a policy’s wording.

“The last thing that a carrier wants is to have to pay for a claim that’s not in the policy,” he said. “That breaks the system.”

Insurers price their products based on very precise calculations — what actuaries determine the company needs in premiums to pay for expected losses. If carriers were to start paying claims outside of what the contract specifies, those calculations would no longer hold up, jeopardizing the company’s financial stability.

So while it may appear that an insurer “doesn’t want to pay,” the truth is often that they’re legally bound not to unless the policy language clearly supports the claim.

This doesn’t mean every denial is fair or correct — mistakes happen, and bad actors exist — but the broader system relies on consistency and adherence to contract terms, not personal discretion.

Fraud Exists on Both Sides

Susman also pointed out that fraud is a two-way street.

“Of course there are bad apples,” he said. “There’s fraud on insurance carriers, and there’s fraud on insurance clients. You’ll see it on both sides if you look hard enough.”

Fraudulent claims — from exaggerated damages to staged accidents — cost insurers billions each year, which in turn raises costs for everyone.

Likewise, when insurers wrongly delay or deny legitimate claims, it erodes public trust and triggers legal scrutiny.

The challenge lies in maintaining balance — ensuring that genuine claims are honored promptly while protecting the system from abuse.

The Takeaway: It’s Not Personal, It’s Policy

For consumers, the key lesson is understanding that insurance isn’t personal — it’s procedural.

“Carriers aren’t out to get you,” Susman emphasized. “They just want to follow the policies as written. And as consumers, we want to do the same.”

If a claim doesn’t fit within the policy’s language, the insurer isn’t legally obligated to pay — even if it feels unfair in the moment. That’s why reviewing and understanding your coverage before a loss occurs is critical.

Susman’s advice to policyholders:

• Always read your declarations page and coverage limits.
• Ask your agent to explain gray areas or exclusions.
• Don’t assume that “common sense” coverage applies — check the contract.

When disputes arise, documentation and communication are everything.

Why Do People Buy Life Insurance for Babies?

After unpacking the tough question about insurer profits, Susman moved to a listener inquiry that was just as emotional — though in a very different way:

“Why do people buy life insurance on babies?”

At first, the idea might seem unnecessary or even uncomfortable. After all, infants don’t earn an income — the traditional reason most adults buy life insurance.

But as Susman explained, there’s a powerful financial and practical rationale behind it — insurability.

Locking In “Perfect Health”

When a baby is born healthy, they have what the insurance industry considers the best possible risk profile — no preexisting conditions, no lifestyle hazards, and no medical history that could raise red flags.

By purchasing a permanent life insurance policy at that stage, parents can effectively lock in that perfect health rating for the rest of the child’s life.

“If you purchase a life insurance policy on a newborn,” Susman said, “you’re taking the fact that they are as healthy as they’ll ever be and locking it in — possibly for life.”

This can be invaluable if the child later develops a health condition that would make them uninsurable or cause premiums to skyrocket.

Protecting Future Insurability

Imagine a child who, as a teenager or young adult, develops diabetes, kidney disease, or another serious condition. At that point, qualifying for affordable life insurance — or any at all — becomes extremely difficult.

But if a parent bought a policy when that child was born, they’re already covered, often with the ability to add coverage later without medical underwriting.

“You’re taking out an insurance policy on getting an insurance policy,” Susman quipped. “It sounds funny, but that’s exactly what it is.”

The Financial Side: Building Long-Term Value

Permanent life insurance policies for children also include a cash value component — essentially a savings feature that grows over time.

By the time the child reaches adulthood, that policy may have accumulated substantial cash value that can be borrowed against or used for future financial needs like college tuition, a home down payment, or even retirement planning.

While not every family can afford this approach, it can serve as a long-term financial asset rather than simply a safety net.

Beyond the Numbers: Emotional Peace of Mind

Of course, the emotional side of insuring a child can’t be ignored. Parents who purchase life insurance for babies often say they do it for peace of mind — to ensure they can handle unexpected expenses, such as funeral costs, without additional financial strain.

It’s a sensitive topic, but one rooted in the same desire that drives all insurance decisions: the wish to protect loved ones from uncertainty.

“It’s not something anyone wants to think about,” Susman said. “But for some families, it provides comfort knowing they’ve planned for every possibility.”

The Bigger Message: Understanding, Not Guessing

What both of these listener questions highlight — from denied claims to infant policies — is that insurance isn’t about emotion, it’s about clarity.

Policies are contracts, not moral judgments. They exist to define risk and responsibility in black-and-white terms, even when life itself is full of gray.

For consumers, that means education is the best defense. Knowing how your coverage works, what it excludes, and how to use it effectively can turn insurance from a frustrating mystery into a tool for empowerment.

“Insurance can seem complicated,” Susman concluded, “but once you understand the logic behind it, it’s actually pretty simple. It’s a promise — one that works best when both sides keep theirs.”

Final Thoughts

The truth is, insurance companies don’t inherently profit from denying claims — they profit from managing risk responsibly. When policies are written, priced, and administered properly, the system works for both sides.

And as for life insurance on babies? It’s less about death and more about ensuring a lifetime of financial security and opportunity.

Whether you’re questioning your insurer’s motives or planning for your family’s future, the same rule applies: knowledge is your best protection.