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Are Insurance Companies Just Big Ponzi Schemes?

October 12, 2020 By MelissaB 13 Comments

It struck me the other night, as I was reading a book and came upon a section on Ponzi schemes, that insurance companies are borderline Ponzi’s themselves.

Ponzi Schemes

What Is a Ponzi Scheme?

The definition of a Ponzi scheme is when the broker/banker/agent takes money and promises an unusually high return and then pays said return from the incoming money from other investors.  Eventually, when the incoming investors dry up, the agent can no longer pay the returns and the scheme comes crashing down.

Ponzi schemes are named after Charles Ponzi, an Italian immigrant who was the original Ponzi schemer.  In recent years, the most famous (and longest lasting) Ponzi scheme is attributed to Bernie Madoff.  Madoff’s Ponzi scheme is thought to have begun in the late 1980s or early 1990s and didn’t end until 2008 when he was arrested.  This Ponzi scheme cheated nearly 5,000 customers out of $60+ billion dollars.

Insurance Companies Are Set Up Like Ponzi Schemes

Now, let’s look at insurance companies.  We, as the insured, pay the insurance company our premiums in return for insurance against some sort of event.

With health insurance it’s against some sort of health event.  With car insurance, it’s against some sort of accident.

In any case, it’s a payment.  Or a return on the premium.  Very seldom will you actually come out with your entire investment.  And, unfortunately, you often have to fight for the payment.  Health care coverage may be denied if the health insurance company doesn’t find the treatment worthy of the expense or if they deem it experimental.  Likewise, if you file a home insurance claim too many times, the insurance company can choose to drop you as a customer.

Ponzi schemes
Photo by Daniel Tausis on Unsplash

For the most part, insurance companies are in charge and decide when to cut customers.  But what would happen if the premium payers dried up?  It would certainly get more difficult for the insurance companies to pay any claims.

How Insurance Companies Are Different from Ponzi Schemes

Where the key difference lies is that if you stop paying your premiums, the insurance company stops paying any claims for you.  Also, as a premium payer, you never really expect your money back unless you have a claim.  You’re paying for the “in case”–if it were to happen.

In a Ponzi, you’re investing your money specifically for the return.  You’re not going to stop investing as long as the returns are stable.  And a Ponzi only really dies when the new investors stop coming.  If new insured stopped coming to the insurance company, they would still have their current insured to collect premiums from.  However, as the years go on with no new insured clients and the current clients age, the insurance company could have difficulty paying claims.

Final Thoughts

Even though insurance companies seem to fit many of the criteria for a Ponzi scheme, no.  insurance companies are not Ponzi Schemes.  But, it sure feels that way sometimes.

Read More

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When Do You Need Umbrella Insurance?

Filed Under: Financial News, General Finance, Insurance, Investing, ShareMe Tagged With: car insurance, health insurance, Insurance, madoff, ponzi, ponzi scheme

What Is Required for a Hard Money Loan?

June 29, 2020 By MelissaB Leave a Comment

When most people buy a house, they take out a loan with a traditional lender.  However, individuals who are interested in buying run down houses to fix them up to then sell or rent rarely qualify for traditional mortgages.  Instead, they seek hard money loans, which have short terms and give the investor more flexibility than a traditional loan.  Before you first enter the home flipping business, it’s important to know what is required for a hard money loan.

What Is Required for a Hard Money Loan?

What Is Required for a Hard Money Loan?

Of course, each lender will have their own requirements, but in general, there are three criteria that are most important when trying to secure this type of loan.  Not surprisingly, many of the requirements circle around cash on hand and experience.

Down Payment

Most banks require a 25 to 30% down payment for residential properties.

In general, a successful hard money loan fit this formula.  Consider the estimated after repairs retail value of the property.  Let say you expect to sell the property for $250,000 when you’re done fixing it up.  Maybe you purchased the property for $100,000.  You expect to complete the repairs for $60,000, and you also want to borrow enough to cover closing costs of, say, $15,000.  Your total comes to $175,000, or 70% of the expected value of the property.  If you use this formula, you will likely qualify for a hard money loan.

Cash Available

What Is Required for a Hard Money Loan?
Photo by Shane on Unsplash

Since hard money loans are inherently risky, the lender will take a close look at your cash reserves.  You will need substantial cash reserves to use during the renovation process to pay for things like HOA dues, interest payments on the hard money loan, insurance on the property, and other expenses.

The more cash you have available, the more likely you are to qualify for the loan.

Exit Strategy

The last thing the bank will consider is your exit strategy.  Most hard money loans only have terms of six to 18 months, so you must have a plan for what to do when the loan term ends.

For private properties, there are two basic exit strategies:

Sell

The most typical option is to immediately sell the property when you’re done renovating it.  You settle the hard money loan, get your profit, and are free to go on to invest in the next property.  Some investors go a step further and get a cash out refinance so they then have even more cash on hand to invest in the next property.

Rent

Another option is to renovate the property, then rent it.  When you rent it, the property is now making money.  You’ll be able to go to a traditional mortgage lender and get a traditional mortgage in place of your hard money loan.

Final Thoughts

If you are considering going into the real estate business, you must first learn what is required for a hard money loan.  When you meet the requirements, you’ll be able to secure your first loan.  After you have amassed more experience and cash, you will find that hard money loans are easier to obtain, and you’ll be able to grow your business.

Filed Under: Investing, loans Tagged With: hard money loan, loans, real estate

Is It Really Possible to Invest When Broke?

March 9, 2020 By MelissaB Leave a Comment

Investing is the best way to grow your wealth.  You can watch your money grow thanks to the compounding power of interest and dividends.  Especially if you start investing at a young age, say your teens or twenties, the power of time is on your side and you will increase your money much more rapidly than someone who begins investing in their 40s or 50s.  But if you’re just starting out or have debt, you may wonder, is it really possible to invest when broke?

Is It Really Possible to Invest When You're Broke?

The answer is, yes, it’s completely possible, though you may start investing with less money and in a less conventional way than other individuals who are investing.  Remember, every little bit helps!

Is It Really Possible to Invest When Broke?

Should you be investing at all if you have debt or if you don’t have an emergency fund or extra money each month?  Yes, you should, but feel free to invest in a smaller way.  Consider some of these options:

Take Advantage of a Company Match

The first place to start investing is in your company’s retirement plan.  This is an even smarter option if your company matches your contribution.

Is It Really Possible to Invest When You're Broke?
Photo by Allef Vinicius on Unsplash

When I started my first full-time job in my 20s, I was broke.  Flat out broke.  And my company automatically withdrew 8% of my paycheck every paycheck to put in the state retirement system.  There was nothing I could do to stop this investment, and trust me, I would have if I could have.

But, I’m so glad I couldn’t!  My company also matched the mandatory 8%, so I was investing 16% of my salary in my retirement.  When I left that job 10 years later, I walked away with an impressive start to my retirement, thanks in large part to the company match.

Use Acorns

Another easy way to invest is with an investing app.  Acorns is a microsaving app that takes the discipline out of investing.  You connect the app to your checking and credit card accounts.  Every time you make a purchase, Acorns rounds up, and the difference is invested.

You can also choose the option to boost your round ups by up to 10x.  So, if you make a purchase for $4.60, normally, 40 cents would be invested.  However, if you boost that amount by 10x, Acorns will invest $4.40 for you.

There are over three million people currently using this app, which is a great way to start investing even if you’re very young, say still in college, and don’t have a full-time job.

How to Learn More About Investing

Once you start investing, you may want to know more and invest more.  If you’d like to learn more about investing, there are several low-cost classes such as Udemy’s Investing in Stocks: The Complete Course.  This 11-hour course is currently $14.99.  If you’d like a free option, Morningstar offers a free investment class that includes 170 lessons!

Is It Really Possible to Invest When You're Broke?
Photo by Markus Spiske on Unsplash

Final Thoughts

The best time to invest is now, especially if you’re young.  But even if you’re not, it’s never too late to start investing.  Your future self will be so glad that you did!

Filed Under: Investing Tagged With: 401k, Investing, Retirement

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