This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.
Previously, Tim wrote about flood insurance. I thought I’d add a couple ideas about health insurance. I got a check in the mail the other day for almost $900 from my dental insurance coverage. Although I never want to have that much dental work done again (it only covers about 70% of the cost, and it doesn’t cover everything), I am glad that we had coverage. I was very fortunate to be in a group (distance graduate students) where I can opt-in to the coverage. So knowing that I was planning to get some dental care, I opted to pay the $500 premium to get family coverage for a year.
Tim pointed out that fire insurance is a viable form of insurance because almost everyone buys it, without knowing if or when they’ll ever need it. As I understand, mortgage lenders require fire coverage. In this case, the probability of loss is fairly well known, so insurance companies can calculate a fair price for insurance premiums. The same is true of life insurance, disability insurance and car insurance. Mandatory coverage ensures that enough people pay premiums that potential losses can be spread out wide enough to keep costs down.
That’s not true of optional coverage, however. So health insurance isn’t necessarily a good idea. Many employees have health benefits through work. In order to make it viable, insurance companies require that all employees (in a given class) be covered. The only way to opt out is if your spouse has coverage. This avoids a situation where healthy people opt out of health insurance, only sickly people opt in and premiums are forced to rise to cover costs. Taken to the extreme, an optional system like this would become pay-as-you-go. That is, you pay a monthly amount that roughly equates, over time, to the total of your health care costs, plus an additional administration cost to the insurance company.
And that’s exactly what you get when you sign up for optional health and dental coverage. In Alberta, we have Blue Cross, which charges premiums that likely equal your health and dental costs, plus an administration fee. Another company, Olympia Trust, offers the same service for small businesses. The benefit to small business owners is that the premiums are tax deductible, so paying for health care with pre-tax dollars (even after the admin fee) saves some money.
Insurance certainly has a place in a financial plan, but not everything that’s called insurance actually spreads costs across a large population. Is your home and car insurance, life and disability insurance adequate and up to date? How do you know? What other coverage do you have or wish you had?