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Are Insurance Companies Just Big Ponzi Schemes?

October 12, 2020 By MelissaB 14 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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MelissaB
MelissaB

Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in New York, where she loves the natural beauty of the area.

www.momsplans.com/

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

Does Your Car Insurance Pay for These Items?

April 6, 2020 By MelissaB Leave a Comment

Do you know what benefits your car insurance has?  Sure, we all know if we get in a car accident, we pay our deductible and get our car fixed thanks to insurance.  But did you know there are several other items your car insurance might cover without requiring you to pay a deductible?  Does your car insurance pay for these items?  I recently learned that these free services are included as part of my car insurance.

Does Your Car Insurance Pay for These Services?

Changing a Flat Tire

I wish I was making this up, but I’m not.  I was driving my child home from school when I saw in my path a metal rake lying completely across my lane.  On my right was a curb, and on my left was a full lane of traffic, so there was nowhere to go.

I tried to avoid the rake, but it punctured my tire.  When I woke up the next day to take my son to school, the tire was completely flat.  Did I mention my husband was out of town?  My son and I tried to get the old tire off, but, thanks to snowy Chicago winters, it was rusted on.  Our neighbor tried to help, but he couldn’t get it off, either.  He then mentioned that I should call my insurance.

Does Your Car Insurance Pay for These Items?
Photo by Sebastian Huxley on Unsplash

I did call my car insurance, and within two hours, a tow truck driver was at our house.  He took off the flat tire, put on the replacement, and didn’t charge me anything.  This was a free of charge service included with our car insurance.  I had no idea.

Windshield Replacement

I was driving on the highway when I heard a loud crack!  I looked at the bottom corner of the passenger side of the windshield and saw that there was a crack forming.  During our 20-minute drive, the crack spread two feet.  During our drive back home, the crack slowly snaked itself halfway across our windshield.

I discovered that our insurance would replace the windshield free of charge.  The insurance company scheduled the appointment for me, and a day later, two men showed up at my house and replaced the windshield in less than 45 minutes.  Again, I didn’t have to pay anything or even do anything.  The insurance handled it all.  I just needed to be home.

Final Thoughts

I used to be hesitant to call my car insurance unless I was facing a major repair.  I didn’t want to pay a deductible AND face having my car insurance go up because of my claim.  But as I learned from recent experience, there are several things your car insurance might cover that doesn’t require you to pay a deductible.  My insurer told me as long as I’m not using these services frequently, the insurance company is happy to offer these services free of charge.  Does your car insurance pay for these items?  If you don’t know, try calling your insurance agency to see if they cover these types of repairs and if there are others they may cover free of charge.

MelissaB
MelissaB

Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in New York, where she loves the natural beauty of the area.

www.momsplans.com/

Filed Under: Cars Tagged With: car insurance, car insurance coverage

Why Purchasing Rental Car Insurance Isn’t Necessarily a Waste of Money

July 1, 2014 By MelissaB 3 Comments

I recounted in my last post the many adventures we had driving 1,750 miles from Illinois to Arizona where we damaged not one, but two rental cars.  We saved $100 by not purchasing the rental car company’s auto insurance, but that decision cost us $500 in our deductible.  Not my brightest move ever.

If you think, like I did, that a rental car company’s insurance is a scam that should be avoided like the plague, here are some reasons why you might want to reconsider:

The Rental Car Company Has a Different Standard Than You

Rental Car InsuranceThe rental car company we used said any damage smaller than the size of a quarter, they would let slide.  Anything bigger than that, and it needed to be repaired.

Any time you drive a car, you risk bumps and scratches to the car’s exterior.  I have a large scratch on the back of my vehicle that I find annoying, but not worth the price of paying my $500 deductible.  I’m guessing your own vehicle has similar scratches and dents.  They’re minor, and you don’t want to spend the money to repair them.

The choice is yours because it’s your vehicle.  However, if it’s bigger than a quarter, the rental car company is going to make the repair, and you will pay if you don’t take out the rental car company’s insurance.

Your Insurance Premium May Go Up

Another reason people let minor dents and scratches on their own vehicles slide is because they don’t want to face a claim and risk having their insurance go up.

Some people even do this for more major repairs.  Several years ago, a man rear-ended me, and he chose to pay the $1,400 for the repair to me directly so he could avoid submitting the claim to his insurance and risk having his premium go up.

If you don’t purchase the rental car company’s auto insurance, you’ll have to choose to pay out of pocket or to risk having your premium go up.

How to Decide If You Should Purchase Insurance from the Rental Car Company

To decide whether or not purchasing insurance from the rental car company is worthwhile, ask yourself these questions:

1.  Have you made any claims on your insurance in the last three to five years?  If so, you will probably want to purchase the rental insurance; in the long run, that will be cheaper than facing a spike in your insurance.

2.  How far do you have to drive?  Of course, accidents can happen anywhere, but if you’re renting a car for the weekend and driving it around your hometown, you may be able to avoid rental insurance.  Our problem was that we were driving 3,500 miles round trip in an area we were unfamiliar with.  Things like dead deer and street sweepers on the highway pose risks that you can’t foresee before the trip

3.  How high is your deductible?  If your deductible is anywhere from $500 to $1,000, purchasing rental insurance may be smarter, especially if it is going to be less than $100.

What is your opinion?  Purchase car rental auto insurance or just rely on your own car insurance?

Original img credit: Insurance Disclaimer on Flickr

MelissaB
MelissaB

Melissa is a writer and virtual assistant. She earned her Master’s from Southern Illinois University, and her Bachelor’s in English from the University of Michigan. When she’s not working, you can find her homeschooling her kids, reading a good book, or cooking. She resides in New York, where she loves the natural beauty of the area.

www.momsplans.com/

Filed Under: Cars, Insurance, ShareMe Tagged With: car insurance, Insurance, rental car insurance

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