INSURANCE IS ESSENTIAL TO OUR FINANCIAL WELL-BEING…
All types of insurance are an essential part of everyone’s financial plan. We typically underwrite risks that, if the unthinkable happened in any of these areas, would create a financial hole that we, or our loved ones, may never be able to get out of in our lifetime. For example, we take out life insurance to protect our loved ones from the dire consequences that would ensue if the breadwinner(s) were no longer alive to “bring home the bacon.” We purchase car insurance for the chance that we are involved in a car accident during our daily travels, and finally, but far from final, we purchase disability insurance to protect us from the terrible consequences that could arise if we were to suffer an injury that would prevent us from “bringing the bacon home” the way we were trained or trained to do so.
Similarly, health insurance gives us peace of mind that a medical emergency followed by an extended hospital stay will not force us into bankruptcy. While some may question the necessity or importance of many of the different types of insurance on the market, I don’t think many people would question the importance or necessity of health insurance. I’m sure any HR professional would tell you that questions about health insurance, its cost, and what it covers are among the most frequently asked questions by new hires and “seasoned vets” alike.
While we are licensed to sell health insurance here at Halas Consulting and have helped countless clients, friends and relatives get health insurance at a reasonable price, it is not our primary job. We typically collect the required information and pass it on to one of our trusted independent brokers. However, we recognize it as an essential part of a complete financial plan, and we regularly request and review coverage for both current and prospective clients.
… BUT THIS IS NOT INSURANCE
The reason for this article is the new set of health care coverages that have emerged to solve the common coverage problems we have here in the US; people who cannot afford conventional health insurance and/or are not eligible for conventional health insurance due to health problems. While there’s no doubt that these health care coverage issues are in dire need of resolution, these new plans aren’t necessarily. Although I have known about these types of plans for some time and knew their pros and cons. I really didn’t have a problem with it as the companies that offered them were pretty outspoken about the fact that these health plans weren’t insurance, however the commercial I saw on TV the other day got my blood boiling when I went to the website of the advertising company went and saw “health insurance” as a drop-down menu on the toolbar at the top of the page. While what they offer is a health care plan, it is NOT insurance, and I’m going to tell you why.
The primary purpose of all insurance, as I mentioned above, is to protect us against a catastrophic loss. That is, a loss that, if we incurred it, might not allow us to repay it in our lifetime. For example, if I, a 38-year-old man, incur a medical catastrophe that, when all is said and done, cost, say, $300,000, chances are it will take me years to pay it off, if it ever happens, and even if I did, there probably wouldn’t be much to enjoy in retirement. Golf and Fishing Excursions to Ft. Lauderdale would certainly not qualify. But if I have a standard, out-of-the-box major medical plan offered by a leading insurer, with a $500 deductible, and 80/20 co-insurance up to $10,000, with the insurance company paying the remainder up to the maximum of the lifetime of $1 million, for example, the maximum I would pay out of pocket would be $2,500 ($500 deductible + 20% of $10,000, which is $2,000). all my life, so the bill would be paid even if I had to borrow a friend’s or relative’s money when needed. If I personally follow the advice I give to clients, I should have more than $2,500 in my emergency cash stash in the highest-yielding FDIC-insured bank account at my favorite online bank.
While $2,500 isn’t pocket money for many, I’m sure you’ll agree that it’s much more achievable than $300,000. The new care plans, which this article focuses on, do things a little differently.
IT SOUNDS GOOD IN THE BEGINNING
Hey, what more do you want? No one is turned down, reasonable monthly fees, not limited to doctors and hospitals, little or no waiting time for pre-existing conditions, discount on prescription drugs and dental programs, and coverage for the above doctor’s office and hospital visits, x-rays and lab tests, pregnancy, visits to the emergency room and much, much more. The only problem is…
FIRST DOLLAR COVERAGE vs. CATASTROPHIC COVERAGE
… this is what I call ‘first dollar cover’. The first dollar coverage most people experience is their insurance “deductible”. The purpose of the deductible is to eliminate smaller “inconvenient” claims. By not having to pay these claims, of which there would be many, the insurance company can keep and invest the money they would otherwise have to pay out on what would be countless small claims, and pass the savings on to their customers through lower premiums. If someone were to purchase an all-cover policy (a $0 deductible policy), the premiums would typically be much higher than a policy with a deductible, and as the amount of coverage in the first dollar that you, the insured, agree to, increases, your premium decreases accordingly. While it’s possible, by paying extra premiums, to get a conventional major health insurance plan to provide first-dollar coverage, its primary goal is to provide protection against catastrophic claims, which is what most people expect from their insurance. The problem is that these new care plans are doing things the other way around. They’ll cover you for your first dollar of coverage and then some, all the way up to thousands of dollars, depending on the set payout limit for the health issue or service, but once that predetermined maximum is reached, that’s the end of it! You have no cover for the larger and potentially more painful financial losses.
To be fair, many of the plans, as I said above, state in various places that the plan is not a major medical/catastrophic loss plan in the fine print, but not everyone reads the fine print thoroughly. I just didn’t like the only company using the term “insurance” to describe what they offer because it is NOT insurance.
Is there a place for these plans? Absolute! If you can’t get great medical coverage at all or if the price is just too expensive, then as the old saying goes, “some is better than nothing.”
If you have a high deductible plan and want something to cover the gap between $0 and the deductible and the health plan premium is reasonable, it might be worth it. The discounts for being a member of the group normally required to join to purchase one of these health plans are usually quite good. Be careful if your health plan is a high deductible plan that has a Health Savings Account (HSA) associated with it. Some HSAs may not allow these additional health plans and continue to give the HSA its tax benefits. It is best to check with the provider of the high deductible whether this is possible.
Ensuring the health of you and your family, and the best way to do it, is one of the most important decisions you will make. make sure you know what you are buying, what it costs and most importantly what it covers. An emergency is not the time to find out that your coverage isn’t what you thought it was. If you need further assistance with this or any other insurance, tax or investment issues, please feel free to contact me at the email address below.