Finance: What is insurance: deductibles, premiums, and risk?

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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

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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

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company is betting your house will be fine and trust

01:07

us They want your house to be fine because well

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then they can keep collecting your monthly premiums almost 10

01:11

grand a year and sit on their hands In the

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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

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Sam Schmucks of 500,000 bucks a year if they had

01:25

to replace an entire home at a cost of 290,000

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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

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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

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bucks premium that you've paid And Sam Schmucks Insurance Company

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keeps it so you can do the math if 10

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years go by and your house still hasn't been washed

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away While Sam Schmuck has collected 10 years of a

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10 grand per year from you and since that money

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is reinvested in bonds and stocks and other investments while

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Sam Schmucks earnings are compounding that is Sam's rolling in

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all that premium payment money and the interest he's earning

02:26

on it invested collectively after 10 years Well if it

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follows a roughly with the markets do thereabouts it'll double

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or more to clarify That is 10 years of 10

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grand and payments is only 100 grand Yet your home

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has financial exposure to Sam Schmuck of 290 grand So

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how is it that 10 years of payments totaling 100

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grand can be worth 290 Well when Sam receives your

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money he invested in some form of the stock and

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or bond market and that money then earns a financial

02:53

return such that it grows at a nice clip And

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he's presuming that your home will last at least 10

02:58

years before it gets Ah washed away to the sea

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And remember he has dozens of homes He's ensuring and

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all those will likely not get washed away Right So

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yes we're guessing on the numbers But it's pretty reasonable

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to think about numbers doubling in and changing or so

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like that in every decade and change But what if

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your house did wash away well After all it's in

03:15

an obviously precarious position and you just couldn't say no

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to the view Could you worth the risk You told

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yourself if you woke up one day to beavers as

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your new neighbors Well you'd be looking to Sam Schmuck

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to pay acclaim and get that insurance dough to go

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buy another home But First Mister Schmuck reminds you that

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you must pay the $10,000 deductible deductible is the dough

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you pay first before the insurance company's money kicks in

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Well this means that in a calamity you must pay

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for the 1st 10,000 bucks before you see any dollars

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from Sam Schmucks Insurance Company Sam Schmucks Insurance Company and

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deals and all kinds of shmoop O R Insurance You've

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got health insurance betting on your health continuing its life

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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

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someone when the risk makes you feel uncomfortable enough while

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so much so that you're willing to pay to reduce

04:05

that risk Well somewhere out there and insurance agents Spidey

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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

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Insurance companies stay afloat because while they're working with a

04:16

lot of data to help them make smart bets remember

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every insurance policy is filled with tons of fine print

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Like if you break your pinky toe it's totally covered

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But the tone next to your pinky toe well that

04:27

one's eso Well insurance companies take all of that data

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and crunch the numbers to make policies that are attractive

04:32

enough to get people to buy them But our waited

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enough toward the insurance company is that it's worth it

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for them to take that risk Ideally they'll make few

04:39

payouts and keep the premium payments rolling in But don't

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worry Even insurance companies have insurance like usually other insurance

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companies in a magical dance of risk sharing called reinsurance

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That's why the insurance market doesn't crack into bits when

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an entire city pulls in Atlantis and goes underwater Now

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put your poker face on or some snorkel gear and

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ask yourself What's worth the risk Is it worth it

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to go skydiving without health insurance Is it worth the

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risk to own a house next to a forest without

05:06

fire insurance What's worth those monthly premium payments that go

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down You're draining into Sam schmucks pockets Yeah well only 00:05:13.449 --> [endTime] you can say good luck