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.