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How insurance companies get your money….


I recently read a BLOG by a financial guy I follow, who pretty much nailed my opinion of insurance in Canada. Many Canadian blue-collared workers are overinsured and/or paying too much for insurance.

   It can be argued, for a start, that if you have insurance for anything that is not required by law, you should have a look at it. Once you have seperated these insurance items out, the next question that should be asked, is, “if you suffered a loss in this area, can you afford to pay for it yourself?”

   When you do this, a few obvious areas of insurance pop up for scrutiny. One of the major areas is supplemental health insurance. In Canada, basic health care is provided by the government e.g. general practioners, specialist visits, and any hospital care costs. Therefore, Canadian supplemental health programs only cover health costs outside the government programs, like drugs, vision, travel, life, and dental insurance. When you pay for supplemental insurance you have to also consider that you are paying for other things that add up to 50% of the premiums you are paying. This is because insurance companies are businesses and not charities. For starters, they take 30-40% of your premium towards their overhead expenses (salaries, commissions, buildings and offices, office equipment, regulatory fees and licenses, etc etc). They also take an additional 10% in profit, because they intend to make money. This is why you only get $50 of coverage for every $100 you spend towards health insurance. In this respect, you are always paying too much for health insurance in comparison to your use.

   Many Canadians recieve supplemental health insurance through their employers. Some of these programs are employer-paid and others are offered as an add-ons and employee-paid. At the end of the day, they are all employee paid because they form part of your overall compensation package. Many companies are moving towards flex programs, where employees recieve a benefits allowance from their employers, and then can pick and choose their desired level of benefits, taking any difference between their allowance and plan levels as savings into a health spending account. They can then use these health spending accounts towards other health costs, which provides a tax benefit. They may also elect to simply take it in cash and forgo the tax benefits. These flex programs are growing in employer popularity, and give employees the ability to taylor their insurance needs to their situations. Lots of employees don’t think twice about it and buy the maximum coverage plans, never looking at it again.

   But what if you’re retired? You usually have the option to convert your employer health insurance plans into private plans without redoing the evidence of insurability exercise, but now you are paying full premiums. In reality you always were paying these premiums, but now it becomes much more apparent as an expense. The insurance company’s hook is that they will convert your plan “without evidence of insurability”, so most people out of fear of having to go through a physical exam or answer health questions over in the future that could impact their premiums, simply elect to convert their plans and keep paying the 50% mark-ups for coverage. They don’t even think twice that they’ve put over $100k for a family of 5 into the plan over their careers, and only got half or even less than half of it out. It’s all about what people think they might lose, not what they might gain, when assessing their need for these programs. And the longer you’ve been in them, psychologically, the harder it is to leave them or avoid them altogether.

   When we retired, we did not convert our plan. We had every intention of not having supplemental insurance. We were planning to pay as we go. 2 years into retirement we bought into a plan out of curiousity, because we could afford it, following the herd, and admittedly out of a small amount of fear. 2 years later and $6800 into it in total premiums, we cancelled it. After having a look at our costs versus the benefit, everything that is explained above reinforced my original position. We had about $300 a year in dental cleanings. If we needed a filling it was another $200. So in any given year our dental bill was $300 and upwards of $700 in a year where we needed other work. We aren’t using presciption glasses, have never needed drugs (yet), and we travel for longer than basic coverage provides. Last year, the wife needed a root canal, and I eventually need a crown. Her root canal cost $1k, and I decided to defer my $1k crown for a filling/cap. I deferred my work because major dental is only covered after year 3, and we were already on the hook for the full costs of her root canal. The other basic expenses were covered at 80%. So, in a bad year of dental where we have a couple fillings and cleanings, we might be around $1k in costs, and get $800 back from the insurer after paying $3400 into it for the year. We take a long trip (6 weeks) every year but can pay for travel insurance separately and for the exact amount of days and coverage we need. Even if we were on the all the same drugs that our parents have been on, it only adds up to another $500 per year. So what are we paying extra for? Again, we are paying for all the insurance company overhead and profits, and all those things rolled into these plans that insurance companies know only 10% of subscribers will need or use in their lifetimes or only need when they are much older. Stuff like mobility devices, in-home care, hospital room upgrades, ambulance rides, etc. You do the math and ask yourself, am I getting what I pay for?

   I have written about this in previous articles. Health insurance is largely a controllable expense in my opinion. But many people don’t see it that way? Investing in your health early pays huge benefits in your retirement. How you eat, exercise, and treat your body in general can reduce your current and future health costs. Processed food, refined sugars, smoking, and alchohol are well-published contributors to poor and potentially devastating health outcomes. Combine these vices with stress, a lack of sleep, inactivity, and lack of exercise, and the ill health effects are compounding. If obesity sets in, your risk factors in all serious illness categories increase.

We don’t smoke. In the last 20 years we started exercising religiously. We have changed our diets in efforts to improve our health a few times. We eliminated processed foods in our 40’s, but have landed on a WFNOPB (whole-food, no-oil, plant-based) diet in the last 5 years. Recently we have significantly curbed our alchohol intake by +90%. It becomes easier as the mind rewires our reward systems. It’s hard to be 100% compliant, life gets in the way, but we give it our very best effort to stay 90-95% compliant.

   In closing, you can control many common health issues, and you can also control your overall insurance costs. You get roughly half of what you’re paying for insurance coverage. Knowing this, the questions are, “do I have to have the insurance by law?”, or “can I afford or risk the loss it protects against in any given year?”. I think you’ll come to the conclusion that insuring your vehicle and home will be no-brainers, while the rest of it like contents insurance, disaster insurance, life insurance, and supplemental health insurance deserve a second look?

What if, you took your premiums ($300/mo in our case), and put them into your own health cost war chest, invested them with a 7% annual return and dripped the profits back in, and used this account to fund any future health costs? This, in effect, is what we’ve decided to do.

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