Banks vs Insurance Companies: Key Differences | SafeMoney.co

By Brent Meyer — SafeMoney.com Founder & Editor Reviewed by Licensed Financial Professionals  |  SafeMoney.com — Trusted Since 2011  |  Updated Regularly Quick Answer: Discover how banks and insurance companies differ in guaranteeing your money. Make informed retirement decisions today! Learn more at SafeMoney.com. Banks and insurance companies are two main types of financial institutions. But they both have key differences, including how they guarantee your money. That can be of importance for retirement savers as they strive to make confident, well-informed decisions about where they park their hard-earned savings. Indeed, it’s not uncommon for this question of “banks vs. insurance companies” to come up when someone is exploring whether to buy a certificate of deposit or fixed annuity . For the reason, this article will focus on life insurance companies for the insurer side of the discussion. Here’s a look at some of the core differences between banks and insurance companies, including how they back customer dollars with financial reserves of their own. Both Institutions Have Different Roles While both are financial institutions, insurance companies and banks have very different business models. They also have highly different roles in the economy. life insurance Companies life insurance companies are in the business of risk management and pooling. They sell life insurance and annuity policies to customers to protect them against different kinds of risk. Some of the risks that these policies guard against include premature death, loss of income or possessions, depletion of assets , and costly healthcare bills.   Policyholders pay premiums, either as a lump sum or regular payments over time, to life insurance companies. In turn, life insurers put this money into long-term investments such as Treasury securities, investment-grade bonds, and commercial real estate holdings. The insurance companies use these monies to uphold their insured promises to their customers. Since they are investing and overseeing these dollars for their own benefit, life insurance carriers don’t create money in the financial system. Banks On the other hand, banks are largely in the business of making money through lending. They collect deposits from customers and pay interest for use of the money. From there, banks lend the money to borrowers who need capital for business reasons. In return, these borrowers pay a higher rate for their loans than the int