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How Can Insurance Be Solvent?



June 03, 2008 – Comments (5)

I was looking at this WSJ article and the numbers around this insurance policy make absolutely no sense.

The woman had a $250k policy that she picked up for a mere $113/month at age 52.  There is something I am not understanding here.  She's planning on leaving this to her children.  I always thought of insurance as only playing if certain criteria are met.  So, you can end up with that kind of payment because many of the policies will never pay a cent.

So, she's been paying on it since 1997, 13 years, or about 156 months for a total of $17,628.  She has now sold that policy for $45,000 and the story here is framed like she's being taken advantage of.  This seems like one hell of a return to me and it begs the question about this kind of think can sustain itself.  My sense is that it can not.

Now, it seems to me that whom ever is buying this policy is paying a major premium.  They are paying $45k for what the woman paid $17,628 over 13 years.  I am still not sure how these policies work, but it seems to me that for the buyer to actually get a return on equity they need these people to die in a time line that they collect.

Maybe they paid her that much because with her health problems they expect here to be far more likely to be one of the policies that would end up paying.

I don't here, but it sure doesn't seem wise to me to set yourself up that complete strangers profit if you die.... 

5 Comments – Post Your Own

#1) On June 03, 2008 at 1:17 AM, dwot (29.24) wrote:

The story about the guy who want to take $580k out of his home through a home equity mortgage is insanely crazy as well.  It is making out like he wants it for living expenses, and that looks like it has to be for quite a few years.  If you do this kind of thing it is insane to take it all at once because then you are paying the spread in interest for money you don't need for years.  A line of credit and slowly tapping into it is the way to go if living on equity is your intention. 

I wouldn't be doing it at 62, but I'd consider the option in the latter part of my 60s.  These days people often live into their 90s so in my mind it is simply way better to down size.  Besides, it makes you clean up years of storing things.

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#2) On June 03, 2008 at 3:49 AM, DemonDoug (31.04) wrote:

it's the broken window fallacy in full force!

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#3) On June 03, 2008 at 12:09 PM, GNUBEE (< 20) wrote:

The insurance company has had 13 years to use her money to make money. If they invested somewhere that got about 8%, they only would have about $21K. So the other $24K has to come from somewhere??. I guess the actuaries are good enough at finding enough "warm bodies" to ponzi up the dying ones?

 She probably had a whole life, that builds cash value (seems too cheap though?)

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#4) On June 03, 2008 at 1:37 PM, camotop (< 20) wrote:

Most likely this is what's happening (please correct me if I'm mistaken).

Poor lady is hard for cash.  Sells her insurance policy to 3rd party for 45k.  3rd party continues to pay premiums.  3rd party is banking on this poor lady expiring soon.  When this poor lady expires (her health issues are pretty much indicating as such) the 3rd party collects the 250k.  So if you look at it, 45k + $113 premiums for not a long time = 250k.  Great return on your investment.

In fact, it is so good and so attractive that this 3rd party may find it more profitable to bundle this type of policy into a package and sell to larger institutions for a fee thereby lowering their risk and the risk of others.  

Welcome to the world of death bonds.  Sound familiar?


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#5) On June 03, 2008 at 3:37 PM, camotop (< 20) wrote:

I did a little more # crunching...

Not counting inflation, assume that JGW can make 10% annually.  15 yeras of Sheron's life expectancy is roughly  the break-even point for JGW.  Which means putting down $45k and $113 monthly at 10% apy for 15 years will cost JGW $247,262 at the end of 15 years.

JGW's cash earning capability and Sheron's life expectancy are the two major factors.  If they normally can make $ more than 10% annually or Sheron would live 15 years longer then this is a not so good buyout for JGW. 

From Sheron's point, it is like a savings account w/ 18% apy.  So yes, it is a bum deal for Sheron b/c she (specifically, her beneficiaries) would benefit more in the long term if she were able to pay the premiums.  So you're right, in light of her health conditions JGW thinks this is a profitable transaction.


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