You bet your friend that the Dallas Cowboys won’t win the Super Bowl for the next five years. But it’s a bit more complex than just a straight up bet. There are terms.
The deal goes like this: You will pay him $100 every time that the Cowboys win the Super Bowl, and he’ll pay you $10 a year at the start of every season for five straight years.
Now, you’ve made an interesting bet. You’re guaranteed to get $50 over five years. But if the Cowboys win five consecutive Super Bowls, you’ll end up paying $500 total ($450 net).
Given that this is a lot of money you could lose, you turn to a friend of yours and ask him to insure some of your potential losses. You say that you’ll give him $2 a year out of the $10 payments...as long as he’s willing to pay $50 if the Cowboys win the Big Game, and you aren’t able to meet your obligations to the original friend. He accepts that deal, knowing how rare it would be for the Cowboys to win even one Super Bowl, let alone one.
One Cowboys win wouldn't bankrupt you. But two might be a catastrophe, not just for your bank account, but also for the morale of everyone in America. Your payments to the person to back up your payments if too many wins are similar to what is known as a catastrophe reinsurance policy.
Insurance companies will buy reinsurance to protect against the aftermath of a massive catastrophic event, or a series of them. Think of an insurance company that must pay for damage from hurricanes...and then a second hurricane hits just months later.
Catastrophe reinsurance lets insurance firms shift some of the risks to other companies in exchange for part of the premiums they receive from policy buyers.
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Finance: What is Life Insurance (Term v....45 Views
Finance allah shmoop What is life insurance Term versus variable
The smackdown and there's A reason that warren buffett is
one of the wealthiest men in the world He sells
insurance great industry great profits usually And great record of
no complaints from the dead Let's Start with term life
insurance The easiest kind of insurance on the planet tau
understand Meet don vannucci He has a wife and two
new kids Twins babies Same hairstyle is their dad Don
is a contract assassin with the nsa as a big
client And he knows that one day there probably is
a bullet with his name on it Or worse So
he buys for fifty bucks a month Term life insurance
which pays his wife three hundred grand if he dies
pretty much for any reason Unless she is the one
who kills him and that can be proved in a
court of law And well you know with his snoring
and you never know You know i've been there So
a month goes by He pays the fifty bucks term
life insurance and does not die So what happens Well
the insurance company keeps all the money and yes there
Were brokerage fees in here but they're relatively small for
this very competitive easy to understand kind of insurance Well
the year goes by in twelve payments of fifty bucks
or six hundred dollars He's not dead yet and the
insurance company keeps all the dough Yeah huge profit margins
And in fact with don at thirty two years old
well in any normal career like you know being a
dia trist or a stockbroker realtor something like that his
life expectancy would be for some fifty more years or
more than that of paying that term life policy So
if he lives that fifty years while that would be
six hundred payments at fifty bucks a month for a
very long time with then escalating payments as he gets
older and you know more likely to die that month
Well the key determining feature in term life however is
that should don ever stop paying his monthly premiums because
he chose not to not because he is dead Then
the policy is just cancelled all of those previous payments
which he could have invested in the stock market and
let compound away growing it in his percent a year
Well they're all owned by the insurance company which took
his six hundred dollars a year each year for decades
and grew it to be worth hundreds of thousands of
dollars by investing it But since don didn't do that
in all fairness at thirty two it didn't seem like
he'd last all that long especially having been given the
afghanistan well then he loses all his back payments when
he cancels at age seventy two just in time for
the assassin who's been contract id to take him out
you know finds him so that's term life terminal life
All right well then what's variable life Well variable life
views that fifty bucks a month in payment as a
kind of sort of investment albeit not necessarily a great
one Had don gotten a variable life policy instead of
a term life policy and then paid into it for
forty or fifty years and then stopped Well he might
have accumulated cash surrender value of some forty fifty sixty
grand or so that is he would have assumed some
market risk as the insurance company invested the money and
he would have at least gotten back some of his
hard earned after tax dough that he invested for so
many years between you know assignments A shame Never heard 00:03:33.47 --> [endTime] the big guy coming
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