Just saw a commercial from an insurance company that says their $15k coverage is available for people aged 80+ for $10/mo... No health questions, and no cancellation.
$15k/$10 per month = 1500 months = 125 years before they break even...
Same way a pension scheme is profitable. Insurance companies take the money and invest it in interest-accumulating assets. In theory, between the start of the scheme and the end of the scheme, enough interest will have been earned to cover all costs.
Same way a pension scheme is profitable. Insurance companies take the money and invest it in interest-accumulating assets. In theory, between the start of the scheme and the end of the scheme, enough interest will have been earned to cover all costs.
MC_BatCommander posted...
They probably make money through investments. It's not uncommon for insurance companies to do that in general
For 80+ year olds, that are probably going to die in less than 5 years?
For 80+ year olds, that are probably going to die in less than 5 years?
As long as they have a steady flow of customers, yeah. Don't think about it on an individual-customer scale. It's all imaginary money anyway, the insurance company just needs to be able to demonstrate they they have a certain amount available, then they can get loans/credit for investing.
An article clip from James Altucher on how Warren Buffet made the riches he made.
WARREN BUFFETT SECRET #1: USE THE RIGHT BUSINESS MODEL TO INVEST First, some basic concepts that are important to understand:
WHAT IS A HEDGE FUND? You give a hedge fund money and they invest it in whatever they want. The hedge fund manager makes money by charging you 2% per year of the money you put in. (If you put in $1 million they take $20,000 per year.) They also take 20% of the profits. (If they return 10% on your $1 million a $100,000 profit they take 20% of that, or $20,000.) So a 2 and 20 fund would make $40,000 on a $1 million investment that returns 10% that year. If a hedge fund has $1 billion in it then they would make $40 million just on the fees. THAT is how hedge fund managers get rich. From fees.
WHAT IS A BANK? Its important to know how banks make money. Because its not very different from a hedge fund. You lend the bank money when you open a checking account or savings account. They then give you a small interest rate return on your savings account (lets say its 1%, although even that is high right now). They lend out the money to people who buy homes (they do other loans but this is most common). They charge (lets say) 7%. The difference between 7% and 1% (minus the cost of their branches and bank tellers) is what they make. (This is rough but roughly accurate.) So if you put $100,000 in a savings account, you might make $1,000 a year. They lend the $100,000 out at 7% ($7,000 a year) and they make $6,000. That is how a bank makes money. In one sentence: you lend them money, they invest it (by lending it to homeowners) and they take 100% of the difference each year until you take your money out. Note: hedge funds make 20% of the profits. Banks make 100% of the profits.
WHAT IS AN INSURANCE COMPANY? Similar to a bank and a hedge fund: You give them money, they invest it. Small differences: You give them money, but YOU NEVER WANT THAT MONEY BACK. If you get that money back it means something bad happened to you. This is different from a bank where the bank is simply holding your money until you take it back. An insurance company tries to never give you your money back. Then they invest it in (mostly) whatever they want. And they keep 100% of the profits. You dont keep any of that.
An insurance company takes money from you every month (so you keep having insurance). Sometimes they return money each month to people who get sick. This is called the cost of the float. Sometimes they make money on that (they give out less than they take in). Sometimes they even lose money on the float. And then they only make money on their investments (minus the cost of the float). A bad insurance company has a high cost of float (they give out more than they take in). A good insurance company breaks even on float (they give out each month, roughly what they take in i.e. people get sick, etc.).
A great insurance company makes money on BOTH the float (they only take money from people who they think wont be sick and will never get their money back) and on their investments. (Foreshadowing: Warren Buffett runs a great insurance company.) Insurance companies use statistics to see who are good risks to take money from and they use statistics to figure out how much money you should give. Extreme example: A 90 year old who wants life insurance will have to spend a lot more money than a healthy 20 year old woman.
These are important things to understand to understand Warren Buffett. NOTE: Banks and insurance companies both make 100% of the profits. BUT insurance companies dont have to give the money back when the customer wants.
To summarize: A hedge fund takes your money for a short time, and takes 20% of the profits. A bank takes your money for a period of time and takes 100% of the profits until you take your money back. An insurance company takes your money FOREVER and keeps 100% of the profits. Warren Buffett made his first million by running a hedge fund. Then he switched to owning small banks. Then finally he shut down his hedge fund and put all his money into running an insurance company. An insurance company is a hedge fund that KEEPS the investors money and KEEPS 100% of the profits. Its the best business model in the world. It makes FIVE TIMES what a hedge fund would make and never has to worry about anxious investors pulling money away.
From the OP, it sounds like they found a massive opportunity and need the money now if they're chasing after grandpas who are high risk of corona chan (if they're not vaccinated) during a pandemic. Those guys are pretty damned ballsy to do such a thing.
So I pretended I wanted this insurance and tried getting a quote. This is for an insurance unit, not insurance... Apparently a unit is equal to about $500 payout if I was 80, and this unit decreases as I get older. It costs $10/mo/payout, and the cap is at $15k unit worth.