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Is Health Insurance Worthwhile?

Contributor:
Mary Holm
Mary Holm

Question:

My wife and I are 68 and 66 respectively, happily retired and financially secure. We are both in good health, though both have had hip replacements in recent years.

We are still careful with our money, and I am currently reviewing our insurance requirements. I am concerned at the cost of health insurance, and looking at ways to minimise this cost while maintaining "adequate" insurance cover. I don't recall seeing an insurance-related question in your column, but it is worthy of a general discussion on the reasons for having insurance, and the options for managing the cost.

In my view, it is easy to over-insure against the worst possible calamity or series of calamities, whereas an individual is likely to only experience one or two in their lifetime. In New Zealand, a major emergency like a heart attack will be looked after in the public system, and insurance is needed mainly for joint replacements and the like, where being on the public list can mean a very long wait.

Our health insurance has options for large excesses, up to $6000 a year, and this drops the premiums significantly while maintaining cover for major surgery, hospitalisation and ongoing treatment. We are in a position to carry such an excess, paying medical expenses out of our investment income and using capital if necessary.

I am a great believer in insurance for major risks (for example, the house burning down or a major hospitalisation), but minor stuff (like a broken window or a visit to the doctor) being paid out of income.

One option I am considering is self-insurance, putting money into a "health emergency fund" each month and using it as required. Saving our present health insurance premiums would fund a hip replacement every two to three years!

I would appreciate your thoughts on the best strategy for insurance, particularly health insurance.

Answer:

Mary Holm: So the challenge is: how to make insurance sexy. The best I can come up with is to look at ways you can save lots of money on insurance - money you could then spend on romantic nights out.

Broadly, I agree with your approach. It's common to over-insure. As a wise person once said, "If you've never missed a plane, you've wasted too much time at airports."

For many people, it's a great idea to have large excesses on all insurance - car, house, contents and so on. If you have loss of income insurance or similar, you can set it up so the payments kick in only after you have been off work for a few months, and the premiums will be much lower.

In health insurance, you could take an option like the $6000 excess, or get cover only for hospital and some specialist expenses, not doctor's visits and other relatively minor stuff.

In all of these areas, every now and then you'll have to fork out lots - perhaps several thousand dollars - when something goes wrong. But you can console yourself by thinking of your much lower insurance premiums. You also avoid the hassle of making minor insurance claims.

A friend of mine, whose health insurance covers specialists' fees only when the appointment leads to hospitalisation, recently paid close to $1000 for fees and scans that ended up with an "all clear". She therefore had no insurance cover, but commented that she much preferred that outcome to the alternative. Having the right attitude is important.

The low-excess approach works particularly well if you are reasonably healthy and a fairly careful driver and home owner - the type who makes fewer than average insurance claims even if you have extensive cover. The average claimer will probably also win, because insurance premiums cover not only the average person's claims but the insurance company's administration costs and profit. But if you are unhealthy or careless, this is probably not for you.

The crucial point is to have enough readily accessible money to cover your expenses if you have a really bad year or two - which will happen every now and then.

One way to do that is to self-insure, as you suggest. But make sure you'll have enough money in that fund - or can easily top it up from elsewhere - if a really bad year happens early on. It sounds as if you are okay, but others might want to build up a self-insurance fund while gradually increasing their excesses.

An alternative is an idea I read about in Peter Bernstein's interesting book Against the Gods - the Remarkable Story of Risk. Bernstein tells of a professor he knows who, at the start of every year, sets aside several thousand dollars that he plans to donate to a charity.

Throughout the year, whenever something unexpected and expensive happens - including paying insurance excesses, parking or speeding fines and so on - he takes the money out of the charity account. At the end of the year, he gives the remainder to charity. Some years it gets heaps; others, very little. In effect, the charity pays when things go wrong.

A couple of other ways to save on insurance:

* See if your insurer offers a deal to people who have more than one policy with them. For example, some companies offer a break for having your house, contents and car insurance all with the same company.

* Some companies charge lower premiums if you take steps to protect yourself, such as installing a burglar alarm.

* Consider how much life insurance you have. While some people have too little - their dependants would struggle if they died - others have too much.

If, for instance, your children are now self-sufficient, or they would manage on what you leave them if you die, you might no longer need any, or so much, life insurance.

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.       

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