ShmoopTube
Where Monty Python meets your 10th grade teacher.
Search Thousands of Shmoop Videos
Finance: What is insurance: deductibles, premiums, and risk? 8 Views
Share It!
- Social Studies / Finance
- Finance / Financial Responsibility
- College and Career / Personal Finance
- Life Skills / Personal Finance
- Finance / Finance Definitions
- Life Skills / Finance Definitions
- Finance / Personal Finance
- Courses / Finance Concepts
- Subjects / Finance and Economics
- Finance and Economics / Terms and Concepts
Transcript
- 00:00
and finance Allah shmoop What is insurance Shmoop All right
- 00:07
people This is you nervous Nellie You're worried about your
- 00:10
house and well here is your house Your house and
- 00:13
Lynn carry a book value I eat what you paid
- 00:15
for it last year of $300,000 You realise that some
Full Transcript
- 00:19
night you may hear it rumbling and it won't be
- 00:21
from your stomach And you'll come fully awake surfing on
- 00:23
your chimney at 90 miles an hour down the road
- 00:26
If this happens you're home will become duck Disneyland And
- 00:29
well it's 300,000 Dollar value will likely be worth something
- 00:32
close Teo zero You can stomach paying $10,000 from these
- 00:37
damages out of your own piggy bank to go find
- 00:39
a new home But you want someone else to pay
- 00:41
the $290,000 gap to go buy an equivalent place somewhere
- 00:45
else with a you know nice view of the valley
- 00:48
Good thing you bought term real estate insurance That is
- 00:51
You pay 800 bucks a month What's called a premium
- 00:54
in return for a Sam Schmucks insurance company being willing
- 00:57
to pay for a new home for you showed your
- 00:59
old home B You know damn well that $800 premium
- 01:02
you pay every month is a bet that the insurance
- 01:04
company is betting your house will be fine and trust
- 01:07
us They want your house to be fine because well
- 01:09
then they can keep collecting your monthly premiums almost 10
- 01:11
grand a year and sit on their hands In the
- 01:14
meantime an update their Facebook pages and the economics makes
- 01:17
sense Sam Schmuck insures 49 other homes just like yours
- 01:20
collecting 10 grand a year from each for total revenues
- 01:23
Sam Schmucks of 500,000 bucks a year if they had
- 01:25
to replace an entire home at a cost of 290,000
- 01:29
every year Well Sam schmuck is still profiting handsomely from
- 01:32
the engagement You're on the other end of the bed
- 01:34
Your bed in your house will not be fine Otherwise
- 01:37
you probably would not have gotten the insurance in the
- 01:39
first place You wanted to have that safety net for
- 01:42
your worry Well this is the stuff of insurance reducing
- 01:45
risk by entering a contract where one party agrees to
- 01:48
compensate another party in the case of specific damage or
- 01:51
losses in exchange for premium payments Yeah that's insurance You
- 01:55
pay the insurance company premiums every month and they pay
- 01:57
you well when you need it If you're home isn't
- 02:00
washed away this month well then you lose all 800
- 02:03
bucks premium that you've paid And Sam Schmucks Insurance Company
- 02:06
keeps it so you can do the math if 10
- 02:08
years go by and your house still hasn't been washed
- 02:11
away While Sam Schmuck has collected 10 years of a
- 02:13
10 grand per year from you and since that money
- 02:16
is reinvested in bonds and stocks and other investments while
- 02:20
Sam Schmucks earnings are compounding that is Sam's rolling in
- 02:24
all that premium payment money and the interest he's earning
- 02:26
on it invested collectively after 10 years Well if it
- 02:30
follows a roughly with the markets do thereabouts it'll double
- 02:33
or more to clarify That is 10 years of 10
- 02:36
grand and payments is only 100 grand Yet your home
- 02:38
has financial exposure to Sam Schmuck of 290 grand So
- 02:42
how is it that 10 years of payments totaling 100
- 02:44
grand can be worth 290 Well when Sam receives your
- 02:48
money he invested in some form of the stock and
- 02:50
or bond market and that money then earns a financial
- 02:53
return such that it grows at a nice clip And
- 02:55
he's presuming that your home will last at least 10
- 02:58
years before it gets Ah washed away to the sea
- 03:00
And remember he has dozens of homes He's ensuring and
- 03:02
all those will likely not get washed away Right So
- 03:05
yes we're guessing on the numbers But it's pretty reasonable
- 03:07
to think about numbers doubling in and changing or so
- 03:10
like that in every decade and change But what if
- 03:12
your house did wash away well After all it's in
- 03:15
an obviously precarious position and you just couldn't say no
- 03:18
to the view Could you worth the risk You told
- 03:20
yourself if you woke up one day to beavers as
- 03:22
your new neighbors Well you'd be looking to Sam Schmuck
- 03:25
to pay acclaim and get that insurance dough to go
- 03:27
buy another home But First Mister Schmuck reminds you that
- 03:30
you must pay the $10,000 deductible deductible is the dough
- 03:34
you pay first before the insurance company's money kicks in
- 03:37
Well this means that in a calamity you must pay
- 03:39
for the 1st 10,000 bucks before you see any dollars
- 03:42
from Sam Schmucks Insurance Company Sam Schmucks Insurance Company and
- 03:45
deals and all kinds of shmoop O R Insurance You've
- 03:48
got health insurance betting on your health continuing its life
- 03:51
insurance betting on you living another month car insurance button
- 03:54
on your car's life homeowner's insurance betting on your home's
- 03:57
life like that property insurance betting on your possessions and
- 04:00
someone when the risk makes you feel uncomfortable enough while
- 04:03
so much so that you're willing to pay to reduce
- 04:05
that risk Well somewhere out there and insurance agents Spidey
- 04:08
senses become engaged and they'll find you Well okay maybe
- 04:12
I'll type it into Google first Then they'll find you
- 04:14
Insurance companies stay afloat because while they're working with a
- 04:16
lot of data to help them make smart bets remember
- 04:20
every insurance policy is filled with tons of fine print
- 04:23
Like if you break your pinky toe it's totally covered
- 04:25
But the tone next to your pinky toe well that
- 04:27
one's eso Well insurance companies take all of that data
- 04:30
and crunch the numbers to make policies that are attractive
- 04:32
enough to get people to buy them But our waited
- 04:34
enough toward the insurance company is that it's worth it
- 04:37
for them to take that risk Ideally they'll make few
- 04:39
payouts and keep the premium payments rolling in But don't
- 04:42
worry Even insurance companies have insurance like usually other insurance
- 04:46
companies in a magical dance of risk sharing called reinsurance
- 04:50
That's why the insurance market doesn't crack into bits when
- 04:52
an entire city pulls in Atlantis and goes underwater Now
- 04:56
put your poker face on or some snorkel gear and
- 04:58
ask yourself What's worth the risk Is it worth it
- 05:01
to go skydiving without health insurance Is it worth the
- 05:04
risk to own a house next to a forest without
- 05:06
fire insurance What's worth those monthly premium payments that go
- 05:10
down You're draining into Sam schmucks pockets Yeah well only 00:05:13.449 --> [endTime] you can say good luck
Up Next
GED Social Studies 1.1 Civics and Government
Related Videos
What is bankruptcy? Deadbeats who can't pay their bills declare bankruptcy. Either they borrowed too much money, or the business fell apart. They t...
What's a dividend? At will, the board of directors can pay a dividend on common stock. Usually, that payout is some percentage less than 100 of ear...
How are risk and reward related? Take more risk, expect more reward. A lottery ticket might be worth a billion dollars, but if the odds are one in...