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IMO, all insurance companies are merely legal ponzi schemes that cannot sustain themselves if they actually covered what they say they do. There's no way you can charge someone x amount per month (we'll say $500) and cover them for $50k+ in insurance claims. It would take 8 years of you paying into it to equal $50k, and they still have to pay their employees, advertisements, overhead, etc, so it's not possible for them to do so.
So what they seem to do is try to weasel their way out of paying any claims brought against them. "Oh, well x happened so we can't cover that" or "Oh, you didn't tell us about that, this claim is null and void". They MUST do this in order to stay in business. Then they throw in deductibles and other loopholes in order to further protect themselves and give them MORE reasons to deny your claim, or at least pay you the bare minimum that they can. Basically an insurance company wants free money from you for years on end only to deny your claim whenever the need to use that insurance arises.
Can someone please explain to me how insurance is not a glorified ponzi scheme?
Insurance doesn't promise a return on your money, they don't invest the money on your behalf and thusly not a Ponzi scheme . Insurance is also not intended to payout on every policy but rather mitigate risk by having enough in the pool
i hope to never collect on my policies for anything . insurance is just a way of mitigating risks that in the small chance they happen to you they would be financially devastating to you .
statistics don't matter to humans as we only have 2 outcomes that can happen . crap happens to us or it doesn't .
someone is on the bad side of things always . is it you ?
take one of the worst areas to be an insurer today , long term care policies .
take even one of what was the shakiest insurers .
as ltc shop pointed out :
The last time I checked Genworth had over $19 Billion in reserves set aside just to pay long term care insurance claims. Reserves are funds that are NOT counted as assets. Reserves can't be touched by creditors (or China Oceanwide). Reserves are used exclusively to pay claims.
Genworth collects about 2.5 Billion in LTCi premiums each year.
They are incurring about $1.5 Billion in LTCi claims each year.
And they have over $19 Billion in LTCi reserves (to pay future claims).
My grandfather had similar sentiments, but I think he was misguided. I believe a Ponzi/pyramid scheme by definition relies on the "entry fee" of newer subscribers to support the payout of older subscribers. Insurance subscribers to not necessarily receive a payout due to statistical outcomes. Further, insurance companies invest the pooled money into relatively safe vehicles, so it doesn't solely rely on subscriber fees to sustain itself; therefore it's not a Ponzi scheme. Insurance companies will not collapse on themselves based on a lower growth of new subscribers, as they would if it were a Ponzi scheme. Keep in mind, Madoff could have perpetuated his scheme as long as new clients and new money kept coming in; it was the drop in growth that exposed him as a fraud.
Insurance companies can even sustain a spike in payouts too because insurance companies cover themselves with reinsurance in case something catastrophic occurs.
Of course the insurance company couldn't make ALL of the claims TODAY if they had to. The actuaries understand that's a nearly impossible scenario. It's pointless to consider such a scenario. It's no different than saying that Fortune 500 companies and individuals don't have enough cash on hand to pay their liabilities right now. They don't need to. It's cash flow management. They're no more "broke" than an insurance company that can't come up with all the money in some mythical scenario where they need it all now in a payout.
Also, as it's been pointed out, no, that's not what a ponzi scheme is. No return is ever promised, and the system doesn't have to fail if their customer base isn't growing.
However, as a (forced) customer of many insurance packages, it doesn't feel like you get good value because you essentially are hoping against bad things happening to yourself. You don't want to draw. If you get fortunate enough for that to happen, it provided you no value. It's set up for permanent disappointment.
insurers make money in ways individuals can't . even today the return an insurer makes even at these low rates is pretty darn good .
if there were 30 of us and one of us died a year and we all owned 30 year bonds at best we or our heirs would get a mere 3% return a year ..
but if we made a deal that if anyone dies the bond goes back in the pot for the living then last man standing at the end of 30 years gets a pretty high return even though it is the same 3% bond .
that is how mortality credits work for an insurer .
They also get the tax payer money as bonus aka bailouts. I also cannot believe the "reserve funds" being untouchable. No one knows.
Tax payer money bail outs for insurance companies? Can you provide a single reliable link to support that statement?
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