Many years ago I was working as a student actuary pricing health and dental plans for employers.  As I was poring over claims that were not eligible to be paid because they were too large (wait, it gets even more exciting) I had an epiphany.  I rushed into my supervisor and declared “this stuff, it isn’t really insurance”!

“No, Glenn”, my knowledgeable actuary supervisor explained, “they’re benefits, not insurance.”

“But everyone thinks they have insurance!” I said. “People think if they get really sick, they will have coverage.”  My supervisor’s response was that employers use these benefits to attract and retain employees, and that they are expected by employees – but the employers need to cut costs.  And they do so sometimes by reducing benefits that nobody every asks about.  People are more worried about whether they have a card they can swipe to pay for their drugs than they are about a cap on their annual claim amount.

Now, before I get specific about health and dental insurance, I want to mention the basic precept of insurance.  Insurance is intended to cover catastrophic financial loss.  And it should be both – catastrophic and financial.  If it’s not financial, it’s not really insurable.  And if it’s not catastrophic then there’s no real need for insurance.  With that out of the way, let’s look at what we probably have with our work plans.

Health insurance

For the most part, when people talk about health insurance they really mean drug costs.  There are other benefits with many health insurance plans like chiropractor coverage, but drug costs are the base coverage.

Can we suffer a catastrophic financial loss with drug coverage?  Absolutely.  I can imagine a situation where I or a family member has thousands or tens of thousands in drug and related costs every year.  And those costs could be ongoing.  Such a problem is certainly financial and easily catastrophic.  The perfect fit for insurance.

So you have a plan at work and you have $20,000 of drug claims one year.  You’re covered right?

Not so fast.  Many work plans have a cap or an upper limit.  You may find your work plan has a drug cap of say $5,000.  Any costs in excess of that $5,000, and you’ll quickly find out that you don’t actually have insurance (that’s what I was doing in my work above, finding claims in excess of I think it was $2000, and capping it at that level – because that’s all the insurer was responsible for).  How’s that for an unpleasant surprise.

Now the various provinces have some assistance for us in worst case scenarios like this, but I think many of us are making the mistaken assumption that our work plan provides coverage in these situations.  If that’s your assumption, I suggest you call your HR department and find out what the actual caps on your drug costs really are.

Real Health Insurance

So you just realized you have a problem – if you actually need catastrophic drug coverage, your work plan may fail you in your hour of need.

The solution?  Stop loss coverage.  This type of insurance is intended to do just that – put a stop to an ongoing loss.  It’s not intended for little claims, just those where you’re really starting to bleed financially.  You can also view it as very high deductible coverage.  Small claims, no payment.  Large claims, it’ll cover everything past a certain point.

You can purchase this type of stop loss coverage privately, outside your employer.  Probably the best known provider is Manulife.  Their ‘CoverMe’ plan has a standalone option called catastrophic coverage that provides no coverage up to about $5000 (there’s a couple of options available) and then covers 100% of eligible drug costs past that.  One or two other companies may have similar standalone products, I’ll leave it to you to Google them rather than promoting a list of products.  Manulife’s CoverMe catastrophic coverage is available online.

If you are purchasing private health coverage, there’s one very big gotcha to look out for – how are your premiums determined next year?  Some companies reserve the right to raise just your premiums.  Others say they’ll only raise premiums as a class (or a group).  You probably want the second choice.  If you have $15,000 in claims one year, do you want to be with a company that has the option of saying here’s your renewal premium – it’s $18,000?  Kind of defeats the purpose.

In summary, be careful that you are informed.  You may think you have insurance for catastrophic drug coverage but really may not.  Get educated on what your work plan provides, and consider purchasing stop loss insurance privately to fill the gaps in your work plan.

Dental Insurance

Do you buy insurance to cover oil changes for your car?  It’s kind of a silly idea.  You know you need to pay $50 or so every 5,000 to 7,000 km (not spring and fall like one person I know).  It’s a routine event you can plan for, and the cost is not overwhelming for most of us.

So, why do you think you need ‘insurance’ for your twice yearly dental cleanings?  Twice a year you know you have to pay $120 to get your teeth cleaned.  It’s routine, it’s not unexpected (so you can plan for it) and the costs shouldn’t be catastrophic for most of us.

In fact, routine dental treatments such as cleanings simply don’t fit the basic insurance definition of ‘catastrophic’.  If you can’t pay the costs of routine dental cleanings, you can start to budget for them so that next time the cash is there.  No need to pay the insurance company’s 20% markup.

But what about braces?  Crowns?  Other items.  I would say that some of these things can be planned and budgeted for.  And they’re probably not catastrophic.  They might be expensive and dent our savings or our credit cards, but they shouldn’t break us.

So why does everyone want dental insurance?

The answer is because many of us see this benefit as ‘free’.  The employer pays for it so we don’t have to pay for that $120 cleaning – or even budget for it.  Of course it’s not free.  The employer is paying your dental costs + 20% in order for you to have this benefit.  (the same is true for things like glasses, chiropractors, and similar coverages).  So we’re conditioned to calling this insurance and thinking it’s for worst case scenarios.  But again, since when is $120 every six months something we need to have insurance for?

To summarize my initial point – there’s nothing wrong with this type of coverage.  But we as consumers should perceive this as a ‘benefit’ of working there, and not so much as insurance.

So what about worst case dental scenarios?  Don’t we need insurance for those?

Sure.  But what are those scenarios?  I’m not a dentist, but unlike drugs, I don’t see a lot of risk in having $20,000 in dental claims, year after year.  I personally don’t see the risk.  I stand to be corrected, but if I run into a large dental claim, it’s likely to be seen as medical and treated under our provincial health care plan.

Like all insurance types, it pays to take a few minutes to inform yourself of what you’ve got in the way of benefits and what the limits are.  The same is true for dental insurance.  If you’ve got it for free at work, hey, snatch it up like it’s the last cookie.  If you’re paying for it it might be worth doing some budgeting to find out what your actual dental costs are, what you figure your risk is for large dental claims, and see if budgeting for those costs is better than insurance.  (The ability to do this points significantly to the catastrophic point I mentioned.  You can’t ‘budget’ your way around replacing a $500,000 home if it should burn down tomorrow – that kind of thing we need insurance for.).

It’s also perhaps worth noting that in other countries such as the US, it’s not just prescription drug coverage that’s important – true health insurance is a must.  While we Canadians are fortunate to have government health care, Americans can run into $5000 in costs just to have a baby, or $100,000 if they have a heart attack.  There’s a huge need for insurance as a result.

I’ll close with a short story.  When my wife became self-employed she lost her gold plated dental plan.  She was bound and determined that we needed dental insurance.  You know, EVERYONE has it.  So we purchased dental insurance for two years.  At the end of two years she added up our insurance costs vs our claims, and our costs were almost exactly 20% higher than our claims.

We no longer carry dental insurance – we budget for it.  I’m prepared to pay for braces or other dental emergencies – your risk tolerance may be different but it is something I recommend you at least address.

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