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Tuesday, April 25, 2017

Insurance

Posted by Robert on July 8, 2013

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?

Comments

3 Responses to “Insurance”
  1. Kestra says:

    I have home (tenant) insurance and car insurance (mandatory here.) And would never be without either. Just one small incident with my car can equal my premiums for the entire year. I’ve never had anything major happen, but it’s great knowing that if I did, the coverage is there. We do have extended health and dental coverage. Luckily, through my husband’s work it’s half the price as if we bought through Blue Cross or Great West Life, and covers more stuff, too. When he quits that job I’ll still get private health/dental insurance. I don’t mind that the premiums are the same or more than what I get back in a given year. I just want to have it in place, just in case I develop a situation with large drug costs. It’s just too easy for them to deny coverage re: pre-existing conditions, so it’s important to avoid gap periods in coverage. Great West Life denied coverage completely for my husband just because he had an MRI scheduled. He’d never been treated for the problem, had no diagnosis, and we’d been fully covered under a student plan through GWL and just wanted to transfer to a private plan. No, they wouldn’t cover him. Luckily he got a job with full benefits that same week. I would have fought them on that because it was ludicrous when we’d had the exact same coverage for the full 20 months prior to that.

    I’m not in favour of life and disability coverage for everyone, though. If you don’t have dependents and your spouse isn’t dependent on your income, there’s no need for life insurance IMO. Since we purposely live on half our income, and could cut back a lot if we had to, the chances of both of us being so disabled we couldn’t do any job aren’t likely. And we wouldn’t be struggling for money if one of us died. So, we have something through his employer because it’s mandatory, but I wouldn’t bother otherwise.

  2. Robert says:

    Thanks for sharing those great examples. (It’s a pretty dry subject, so I especially appreciate your response.) I agree that life insurance isn’t for everyone. In a situation where no one besides you (the insured) depends on your income, it’s not necessary. As soon as I quit working, I cancelled my life insurance and disability insurance. Couples with no children or where both spouses work are in the same situation, usually. That’s why it’s good to understand your situation and understand the need that insurance is supposed to meet.

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