How is insurance different from a Ponzi scheme? - I'm retarded with money

[Penis Drager]

So let me get this straight:
You pay a monthly fee to a company that promises to give you money when you need it in the case of something bad happening. But that money is basically coming from other people paying this company who have yet to file a claim. Yet said company is making profit so the money in is necessarily greater than the money out. So statistically speaking, the average person must end up paying more in insurance payments than they receive in benefits. To make matters worse: just about any form of insurance will charge a higher fee if you have a greater chance of filing a claim. And even if you do file a claim, they will look for any reason to refuse to award it.

Why not just invest in a Ponzi scheme instead? At least then you have the freedom to pull the money out whenever you choose and there's actually a correlation between the input and the output.

 

[Retink]

Most insurance companies invest the money taken in, so they do in theory make money outside of just what's brought in from members.

There are reasons why insurance can make sense, but there are also a ton of problems with it. The bigger issue is that people look at it, see the problems, and instead of wanting competing systems they try to make it mandatory and linked to the government, sort of like university degrees, which just makes the problems all the worse and kills any chance of a solution.

 

[Testacles Maximus]

Cops don’t ask for proof you’re involved in a Ponzi scheme after they pull you over for bullshit reasons.

 

[Penis Drager]

Cops don’t ask for proof you’re involved in a Ponzi scheme after they pull you over for bullshit reasons.

You obviously haven't dealt with the cops where I live.

 

[A Very Big Fish]

When insurance companies fuck up, the people in charge usually don't off themselves, so might as well give your money to the ponzi scheme.

 

[libRT]

So let me get this straight:
You pay a monthly fee to a company that promises to give you money when you need it in the case of something bad happening. But that money is basically coming from other people paying this company who have yet to file a claim. Yet said company is making profit so the money in is necessarily greater than the money out. So statistically speaking, the average person must end up paying more in insurance payments than they receive in benefits. To make matters worse: just about any form of insurance will charge a higher fee if you have a greater chance of filing a claim. And even if you do file a claim, they will look for any reason to refuse to award it.

Why not just invest in a Ponzi scheme instead? At least then you have the freedom to pull the money out whenever you choose and there's actually a correlation between the input and the output.

Can you pull your money out of ponzi schemes? I thought that its basically you put in an initial payment and hope you're early enough so you see a return and not get bilked.

Insurance does serve a purpose, its sort of a voluntary tax, a simple example:
1000 people earning $1000/year. to rebuild a house after an accident like fire costs $100k in this scenario, now if any individual has a fire in their house, without insurance they are fucked. Say one house burns a year, if all of those people pay $100/year. That is enough to cover all of them in case they have a fire.

Thats the purpose of insurance, though considering the insane profit margins and some of the conditions on insurance push it in the scammy direction of ponzi schemes.

Car insurance in the UK is an example of evil insurance, because it is mandatory the insurance companies can fuck you right over. I've paid at least £5k on car insurance that I wouldn't have had if it wasn't mandatory (I'd get legal insurance if it was voluntary but none of my cars have been worth insuring). It's more of a tax than insurance.

 

[Epic Fail Man]

It's not, we live in a society.

 

[Least Concern]

Insurance does serve a purpose, its sort of a voluntary tax, a simple example:

Except in cases where it's not voluntary, such as auto insurance if you want to drive a car, or health insurance under Obamacare.

It's not a Ponzi scheme, but it is a sort of lottery, where you "win" if something unfortunate happens to you, since the unfortunate thing won't be quite as unfortunate as it might otherwise be since the costs of it will be at least partially covered. But yes, it does feel quite scammy. I really should have good health insurance at my age, but every time I look at the costs I'm dumbstruck at how much more expensive it is than just paying the bills myself after I go to the clinic or the dentist. It's almost comical how much even a "bronze" health plan would cost me, and it'd have such high deductibles that I'd be paying almost everything out-of-pocket anyway. (I'm self-employed so I don't have company bennies.) Yes, I'll be screwed if I get diagnosed with cancer or some other severe thing, but I can't afford not to take that gamble.

 

[Penis Drager]

Can you pull your money out of ponzi schemes? I thought that its basically you put in an initial payment and hope you're early enough so you see a return and not get bilked.

You can pull your money out whenever you want. They disguise themselves as investment firms. They offer/report unrealistic gains from the money you put in and, when you pull out, they just give you money other people invested.
Virtually nobody knows they're involved in a Ponzi scheme when they are. Those that do keep close tabs on it knowing it will collapse any minute.

 

[DumbDude42]

insurance is risk management.
every human is subject to the risk of random damage from unpredictable life events. buying insurance means you're hedging against that risk, thereby reducing or eliminating your financial exposure to it.

 

[libRT]

You can pull your money out whenever you want. They disguise themselves as investment firms. They offer/report unrealistic gains from the money you put in and, when you pull out, they just give you money other people invested.
Virtually nobody knows they're involved in a Ponzi scheme when they are. Those that do keep close tabs on it knowing it will collapse any minute.

Yeah I was thinking of pyramid schemes.

 

[JULAY]

Except in cases where it's not voluntary, such as auto insurance if you want to drive a car, or health insurance under Obamacare.

It's not a Ponzi scheme, but it is a sort of lottery, where you "win" if something unfortunate happens to you, since the unfortunate thing won't be quite as unfortunate as it might otherwise be since the costs of it will be at least partially covered. But yes, it does feel quite scammy. I really should have good health insurance at my age, but every time I look at the costs I'm dumbstruck at how much more expensive it is than just paying the bills myself after I go to the clinic or the dentist. It's almost comical how much even a "bronze" health plan would cost me, and it'd have such high deductibles that I'd be paying almost everything out-of-pocket anyway. (I'm self-employed so I don't have company bennies.) Yes, I'll be screwed if I get diagnosed with cancer or some other severe thing, but I can't afford not to take that gamble.

Or you could just live in a non-US country and not have to make such retarded decisions in the first place.

 

[hhaergenreyt]

So statistically speaking, the average person must end up paying more in insurance payments than they receive in benefits.

You're confusing money with utility. Money is worth more the less of it you have. Lets say there's some rare but catastrophic event that might happen to you. It has a 1% chance of happening in your lifetime, and if it happens, it will cost $1 million to fix. An insurance company says: give us a one-time payment of $10k and we will insure you against this loss. Should you take the offer, or persist uninsured?

From a purely monetary point of view, these offers are completely equivalent. A 100% chance of losing $10k has the same expected loss as a 1% chance of losing $1million, because 0.01x1,000,000 = 10,000.

But your utility -- your subjective assessment of value -- is not linear in money. For a man who is destitute, a dollar is worth a lot more than it is to a man who is rich. The more money you have, the less any extra money is worth, and the less a loss of money upsets you. But if you don't have very much to begin with, even a small loss hurts you a lot. This is called "concave utility", because the graph of utility against money has a concave shape.

(If you are still confused -- think about how much your life would be fucked up if you actually had to pay that $1million, and you couldn't just declare bankruptcy. It would hurt more than 100x as much as having to pay $10k.)

So evaluating those offers in terms of utility, taking the insurance is better.

Now of course, no insurance company would ever give this exact offer because there's no profit in it. They might insure you for $11k instead. Or $12k or $10.5k. Somewhere there will be a price point where the insurance company is satisfied with the profit, and the people buying it are satisfied that the certain amount they have to pay is still less painful than the risk of catastrophic loss.

Put another way, people prefer certainty to uncertainty, and are willing to pay to convert uncertainty into certainty.

 

[Agent Abe Caprine]

A ponzi scheme is a lot more honest about how much it wants you dead.

 

[The Ugly One]

Insurance isn't an investment and has a negative expected return. You're paying a fee to eliminate the possibility of a financial catastrophe happening to you that you can't afford. Your house will probably never burn down. If it does, and you don't have insurance, you are completely fucked forever.

No, you're never getting your fire insurance back. It's a fee you pay to avoid losing everything if something bad happens.

 

[Least Concern]

Or you could just live in a non-US country and not have to make such retarded decisions in the first place.

My already astronomical tax bills would increase (let me tell you, when you're self-employed and not having deductions taken from your paycheck automatically and therefore have to actually send the IRS money manually, you really understand how much the government robs from you. Income taxation is theft, literally) and my quality of care would decrease. The last time I needed stitches it took about 15 minutes from arriving at the clinic to having thread in my arm, and most of that time was spent cleaning the wound beforehand. From what I've heard about socialized healthcare, I might still be waiting otherwise.

I'm not much of a patriot but I am very convinced from seeing government incompetence and corruption in other fields that America has it mostly right when it comes to health care (things were better before Obama obviously).

 

[mr.moon1488]

I'd compare it more to gambling. Just like how Vegas was not built on winners, insurance companies were not built on people who got their money's worth.

 

[discombobulate]

I'm not much of a patriot but I am very convinced from seeing government incompetence and corruption in other fields that America has it mostly right when it comes to health care (things were better before Obama obviously).

He just meant you don't have to make those decisions because the government will decide how many months you have to wait to find out if your cancer has spread throughout your body.

 

[Grub]

It's not.