Health Insurance not really insurance

This article was originally published several years ago and written by insurance expert Glenn Cooke. I’ve received many questions from clients and soon-to-be retirees asking about losing their employer health insurance coverage, so I’ve decided to re-publish this excellent piece today.

Many years ago I was working as a student actuary pricing health insurance 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 $2,000, 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 $5,000 (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 $150 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% mark-up.

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 $150 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 $150 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 then 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 $5,000 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 versus 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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15 Comments

  1. Pam on November 12, 2020 at 2:01 pm

    I have opted out of our work dental plan once I did the math and figured out it wasn’t worth the money when I only really get a check up and two cleanings a year. I had some major dental work done but it wasn’t going to be covered and that’s when I dropped the coverage altoghter.

    I do keep my health benefits through work and appreciate the drug coverage.

  2. Pat on November 12, 2020 at 3:06 pm

    Great article. I did the math too, but haven’t yet pulled the trigger. Forty years of Insurance has me conditioned into thinking I need it. Thanks for the little push!

  3. Rick Piper on November 12, 2020 at 3:18 pm

    I have been in the insurance business going on 37 years now both as a consultant and have now worked for an insurer for 18 years and while I somewhat agree with your comments, I don’t in all aspects. Frankly, I have found very few programs that cap an individuals drug spend to a certain dollar maximum. Yes I have seen a few but now with individual large amount pooling (ILAP) mechanisms folks typically get the coverage they require if not through their plan then through government programs that pay for catastrophic drugs. Yes, employers and their employees pay for coverage and premiums rise with utilization, the higher the utilization the higher the premium however, folks do get covered for a variety of programs that some may otherwise not be able to budget for as they do with their monthly or bi-weekly premiums. For this reason, it is part of an overall financial plan that protects folks from unexpected costs should they or their families health needs change or become compromised.

  4. littleleftie on November 12, 2020 at 3:20 pm

    As a retiree, my plan from the gov’t (hospital employee) offered excellent travel insurance but the rest of the plan was very poor. My husband’s MD told him “you have the welfare plan only you have to pay for it!”. After keeping it for 4 years ( we were travelling during the winter so wanted the travel coverage) I ditched it. Figured out that at close to $400 monthly, my cost, it was ridiculous when we no longer travelled plus neither of us takes any medication. Should have gone with my first instinct which was to, at retirement, cancel the plan and put the $400 into a separate savings account just for healthcare. Didn’t. Spent close to 24K for nothing. Yikes!!

  5. Dale Schoffer on November 12, 2020 at 3:29 pm

    Robb, your article is accurate but omits other insurance aspects and benefits of health and dental insurance, especially for retirees such as:
    1. True, many policies have limits on things like drug costs (for example, $10,000 per year or $300,000 per lifetime policy), but there is still an insurance element in there in excess of “normal” monthly medical costs. It is not unlimited insurance, but no insurance policy is limitless.
    2. Some people, especially those on fixed incomes, cannot bear fluctuating monthly health care and dental costs. A steady monthly insurance premium is easier to budget for than erratic health care and dental expenses.
    3. Policies that include out-of-province or out-of-country coverage are indeed true insurance policies covering catastrophic medical expenses when travelling.
    4. Some policies secure benefits into senior years which otherwise would not be available or would only be available at very high cost. Those polices can be continued for a senior into their 70’s, 80’s and beyond which otherwise would not be even available including out-of-country travel insurance.
    5. Some group policies risk share so as to eliminate excessive insurance premiums that increase faster the older you get.
    As a retiree, I am very happy with my extended health and dental insurance policy that I pay monthly premiums for. It has many benefits which you correctly identify as not being insurance – fixed monthly premiums that reimburse typical costs – but the policy will cover my spouse and I for as long as I live with only CPI price increases that everyone in the group pays. As “snowbirds,” we have out-of-country medical travel insurance without an age limit so we have coverage for as long as we are able to travel. They will even cover us for COVID-19 related health costs out-of-country during the “avoid non-essential travel” advisory.
    It is fair for you to identify that health and dental insurance often is not true “insurance,” but it is not fair to conclude that means there are not great benefits to be derived from the appropriate health and dental insurance policy.

    • Robb Engen on November 12, 2020 at 4:54 pm

      Hi Dale, the article certainly generalizes health and dental as routine prescription drugs and check-ups. I’ve found that’s what most of my clients and readers are wondering about when they ask about “health insurance” in retirement.

      Of course you need travel insurance for out of country trips, as most credit cards have little to no coverage after 65.

      For routine health coverage, though, my advice is to look back at recent expenses under your employer sponsored health plan and then research some plans for retirees to see if the coverage is worthwhile.

    • Sue on November 13, 2020 at 7:29 pm

      Interesting. What plan are u enrolled in?

  6. Dan Simard on November 12, 2020 at 7:41 pm

    This is an excellent article. I recently retired at 60 years old and have been paying for the Followme medical and dental insurance from Manulife. Based on the premiums and the deductibles, I am likely going to cancel it. I am intrigued by the Manulife Coverme Flexcare catastrophic coverage, which is available for drug coverage above $4,500 per year.
    As an Ontario resident, is this not redundant with the Ontario Trillium drug plan? This has a deductible of approximately 4% of your net income, which could be even lower than the Manulife plan.

  7. Sarah on November 12, 2020 at 9:22 pm

    Great article- made me realize I should shift my thinking from having insurance to benefits. I’m thinking from now on I’ll match the cost of dental appointments and put that money in VEQT.
    Thanks!

  8. Jay on November 12, 2020 at 9:32 pm

    Any idea if we can buy “stop loss coverage” type of insurance for house or car?
    Specially for house, it does not make sense to pay that much money for insurance if you have to be afraid to claim small losses like 5k or 10k in succession (many insurance companies deny covering your house if you have about 3 claims in a short period of time, no matter how small the claim is).

  9. Steve Bridge on November 13, 2020 at 8:11 am

    Thanks for the excellent article Glenn and Robb. Extended health coverage is something I think about for myself personally (I am self-employed) as well as for my clients (I’m an advice-only planner).

    For me personally (I am 48), I choose to self-insure and save up the money for dental, drugs, etc.

    With regard to my clients, most of my discussions revolve around what coverage is required once retired. I hesitate to use a ‘look backward’ approach for healthcare costs, because these are likely to increase as we get older. I worry that my clients will be 75 or 80 by the time they need the coverage, but by that time it may be prohibitively expensive. So kind of a catch-22.

    Thanks again.

  10. Riley Anderson on November 13, 2020 at 1:17 pm

    I have the same story as your wife, I learned this the ‘hard’ way as well a few years ago lol. Of course I needed dental insurance, right? …nope

  11. Marie Almeida on November 13, 2020 at 2:36 pm

    What would you suggest for dental coverage as implants can be very expensive? Thanks.

  12. David in EY on November 25, 2020 at 10:32 am

    Hi Robb,

    Very interesting post as usual…

    Didn’t see any comments from a business owners perspective. Indeed in my experience the costs are 20% or more of the direct claims paid by the plan. However, One of the benefits I have as an owner is the ability to make a “Cost Plus” claim. These claims allow a plan participant to “expense” all health and medical expenses that are not directly covered by the plan. The company pays the full amount to the plan participant (me), plus a fee to the insurance company, and this is fully deductible by the company as a payroll benefit expense. Each year, I have thousands of dollars of out of pocket expenses, and this is a much more tax efficient method of extracting company funds versus salary or dividends… Also, as a business the premiums are deductible while the payments are not, so that also needs to be factored into the math…

  13. Kevin on December 2, 2020 at 9:32 pm

    The Manulife Cover Me coverage for “catastrophic drug costs” pays for all drug costs over either $4500 or $10,000 in a year, depending on which you choose, while Ontario’s Trillium Drug Plan pays your drug costs over 4% of your household net income (line 23600 from your tax returns). If you have household net income of, say, $100,000, TDP covers your costs over $4,000 already, so the Manulife product does nothing for you. If your net income were $150,000, TDP would start at $6,000 of drug costs, so he Manulife product with a $4500 threshold would pay you $1500. What household with $150,000 a year needs insurance for a $1500 expense? I don’t know what programs exist in other provinces, though. The Manulife product is not available in Quebec.

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