Beating Broke

Personal Finance from the Broke Perspective

Are Insurance Companies Just Big Ponzi Schemes?

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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.

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When Do You Need Umbrella Insurance?

When Do You Need Umbrella Insurance?

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You likely have the insurance you’re required to get, such as auto and home insurance, and you probably have health insurance, and hopefully life insurance.  For many, that’s enough insurance to adequately protect you and your assets.  However, in some cases, you may also want to consider more coverage.  If you’re wondering when do you need umbrella insurance, there are several situation when buying it may be wise.

When Do You Need Umbrella Insurance?

What Is Umbrella Insurance?

Think of umbrella insurance as an extension of the auto and home insurance you already have in place.  If you have an auto policy with a $500,000 cap for injuries sustained, and you have an accident in which several people are severely injured, that $500K may be used in very little time.  When that amount is exhausted, umbrella insurance steps in and covers the rest of the costs, up to the limit of the policy.

When Do You Need Umbrella Insurance?

Likely, most people living low risk lives do not need umbrella insurance.  The basic insurance they have in place will cover them.  However, there are some times when you’d benefit from umbrella insurance.

You Have Significant Assets

If you have assets over $500,000, you may want to consider an umbrella policy.

You Have a Teenage Driver in the Home

When Do You Need Umbrella Insurance?
Photo by Matt Chesin on Unsplash

Teens are inexperienced and can be reckless, increasing your liability.

You Frequently Have Visitors to Your Home

More visitors mean more chances for injuries or accidents to occur.

You Have a Trampoline

Fun, but an accident waiting to happen, especially if you don’t have net fencing around it.

You Have a Rental Home

A rental home can be a great income source, but having one opens you up to lawsuits and expenses, especially if someone is injured or if the house sustains damage in a fire or other weather-related event.

You Have a Pool

Minimize your liability by having a fence around your pool, but still, someone might drown or fall and hurt themselves.

You Have a Dog

You may think your dog is gentle, but it only takes once for a dog to get aggressive and bite someone.

Caveats

There are two important pieces of information, should you be considering purchasing umbrella insurance.

First, your rates on your existing auto and home insurance policies will likely go up.  If you buy your umbrella policy from the same company that you purchase your auto and home insurance, they may first want you to increase your coverage for those policies.  The umbrella pays out only AFTER the auto or home insurance is exhausted, so they want those limits to be high enough, which raises your premiums.

Second, if you are sued in the future and have your auto, home, and umbrella insurance with the same company, the insurer may hire you an excellent lawyer because they want to avoid paying out the money, if they can.

Few people discuss this type of insurance, and most people don’t need it.  However, if you have liabilities in your life, such as a pool where someone may drown or slip on wet tile and hurt themselves, you may want the peace of mind that umbrella insurance offers.

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Do You Compare Your Finances to Others?

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I belong to several Facebook groups, and recently, a woman in one group asked the seemingly innocent question, “What do you pay for cell phones and car insurance?”  She added, “We pay $180 a month for our cell phones and $345 a month for our car insurance.”

Say what?

When you read that number, you automatically think one of two things–“Wow, she’s paying a fortune for cell phones and car insurance!” (that was my initial thought), or, you think, “Sounds about right.”

Comparing FinancesA few of you may even think she’s getting a good deal.

My husband and I each carry a cheap cell phone from Tracfone that is for emergencies or occasionally checking in with one another.  We don’t spend any more than $10 to $20 a month on them.  Our car insurance is about $55 per month.  (We only have one vehicle.)

After reading how much this woman spent, I was feeling pretty good about myself.  But why?  I really don’t know her situation.  Her cell phone plan might include cell phones for the whole family.  Her car insurance is likely for multiple cars.  Maybe she has teenage drivers, or maybe she or her spouse has gotten a ticket recently.

Besides, I have no idea how much money she makes.  These bills might not be that extravagant in relationship to her income.

There’s really no point comparing my situation to hers.  To do so would invite complacency toward my own budget at best, and a loosening of the purse strings at worst because, hey, other people are spending a lot more than me.

The Only Time You Should Compare Your Spending to Others

Generally, I try not to compare my spending or budget to others.  Circumstances vary widely, and knowing another person’s exact financial situation is difficult.  Too often, especially online, we get a snapshot of someone’s finances and think we see the whole picture when we don’t.

We make assumptions of our own financial situations based on others.

Ultimately, we need to strive to do the best we can do with our own budgets.  To beat ourselves by spending less and/or saving more than we did the month before or the year before.

The only time it makes sense to look at someone else’s finances and spending is when they are doing considerably better than you, and you want to learn from and emulate them.  For instance, I knew my husband and I were spending too much for groceries.  One blogger I read has grown a large garden and planted fruit trees so that she can feed her family of 9 for less than $300 per month.  (Yes, you read that right.)

I know I won’t  ever have a grocery budget of $300 per month, but reading her techniques and strategies has encouraged me to cut my grocery budget and try to spend less.  It’s even inspired me to try out once a month shopping to reduce costs.

Ultimately, we shouldn’t compare our finances to others, but if we’re going to, we should only compare to those we wish to emulate.

Do you look at other people’s spending to make you feel better about your own or to motivate you to improve your finances?