Insurance premiums aren't profit: The money paid for insurance isn't considered income for the company. It's seen as a reserve to pay out future claims.
Taxation on investment income: Insurance companies invest a portion of the premiums they collect. The income generated from these investments is typically taxed like any other company's earnings. Insurance companies invest in real estate, mortgages, and stocks. Gains on sale of investments may be taxable but they seem to roll the gains and rarely pay.
Reserves and claim payouts: The money set aside for potential claims acts as a buffer, reducing taxable income. Insurance companies can only deduct a portion of these reserves each year, following specific tax code guidelines.
Different tax treatment for life insurance: Life insurance companies often have a different tax structure than property and casualty insurers. They may receive special tax treatment for a portion of their reserves due to the long-term nature of life insurance policies.
In essence, insurance companies are taxed on their investment income, not the premiums they collect. However, the way they manage reserves and the type of insurance they offer can influence their overall tax liability.
