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....
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