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Wednesday, December 30, 2009

Oops, The Model Is No Longer Working

A very interesting article on VIN that has hardly any comments about the impending Chareidi Housing implosion. An actuary could have pointed out that the "cash gemach" model isn't fiscally sound.

Speaking of other unsound plans, I recently read some comments regarding cash gemachs that people lend to, sometimes in order to shield assets, and others borrow from to pay bills. I have no idea what type of internal controls exist regarding asset protection, to say nothing of yashrut. I don't think my readers would consider such a fund, but I think it is incumbent on the rest of of to point out the obvious: co-mingling money in informal funds carries tremendous risk. "A fool and his money are soon parted." If you want to contribute to a free loan fund, do so. It is a mitzvah. If you want a checking account, head to your local FDIC insured bank and open up an account.

And speaking of other plans that don't work, I've recently seen print and Internet advertisements for a "life insurance" plan of sorts. Groups of frum people are pooled together and if someone passes away, each member's credit card is charged $6 per orphan to alleviate the crisis. The sentiment is lovely and carries plenty of endorsements, but note that the plan is NOT endorsed by actuaries. So much effort is placed into these plans, but they aren't fiscally sound (see CC discussion prior to the launch of this program). I simply just don't understand why tzedakah funds can't be used to help those with less purchase real life insurance plans from a reputable company. Less risk, same intention. Although the organization is honest that this is not a life insurance plan, I can easily see it being construed as a plan of sorts. I understand that many people who would not be inclined to purchase life insurance might be tempted to use their ma'aser dollars and join this plan. But ultimately I think we would be better off to educate people about the importance of life insurance and possibly help those with less purchase a plan.


tesyaa said...

Many companies are raising their term rates, but not all. There is still a lot of competition in the term life market, and competitive pressures are keeping rates very reasonable.

Anonymous said...

Seems like all anyone wants to talk about today is tuition.

Charlie Hall said...

I was one of the commenters but I only mentioned the housing prices. I would never "invest" in an unregulated gemach. Better to give direct charity. And if you are using the gemach to hide assets, well, as far as I am concerned you are not a frum Jew.

Anonymous said...

While I don't agree, I have seen statements that the life insurance like tzedaka funds are aiming at people who believe it is not preferable (or maybe even halachically problematic) to purchase life insurance. These groups pool 10k ppl together, to provide term-insurance like funds.

I agree that it does not make sense from an actuarial perspective, it makes use of maaser funds instead of expense dollars.

Charlie Hall said...

Forming "term-insuranc like funds" without registering with your state insurance commissioner is incredibly risky and may be illegal. There are reasons that regulators mandate reserve requirements for financial institutions and it isn't to increase costs or profits. There have been cases where insurers have gone bankrupt because they had inadequate reserves and in some of those the policyholders got nothing.

If you want to form a mutual insurance company -- and some Christian groups have done just that -- do it right. Hire actuaries and raise the reserve capital you need.

tesyaa said...

CH, I think what you are describing is technically called a fraternal -- just showing off a tiny amount of professional knowledge :)