Things to insure, things not to insure

Photo: John Collier

Insurance is all about spreading the risk. A bunch of people buy insurance against the risk that a few of them will be the ones who get hit with a big bill that they couldn't pay. The model works fine for house fires and car crashes. However, it's a terrible model for ordinary, predictable expenses. Here's some tips on picking what to insure and what not to insure.

The basic rule for all kinds of insurance is: Bear the risks you can afford, insure the ones you can't.

The key point is risk. There's no point in insuring your predictable expenses, even if they're large. For example, around here homeowners need to pay their property taxes twice a year, and each payment is pretty big. But there'd be no point in "property tax insurance," because there's no risk to spread around--the insurance company would have to charge a premium that added up to what you were going to pay in property taxes anyway (plus enough to make a profit).

Two fairly common kinds of insurance that fall into this category are dental insurance and optical (or vision) insurance. To the extent that they cover the cost of checkups and basic care (fillings, new glasses), they're really just paying for routine expenses that you could easily budget yourself.

There are two reasons why it's better to budget these things yourself rather than buy insurance for them (although they both come down to the insurance company's profit).

First, it's cheaper. The insurance company makes its profit by charging more in premiums than they expect to pay out. If you just pay the expenses yourself, that's all you have to pay. (The insurance companies also pick up a little interest by holding the money between when you pay the premium and when they pay the claim--which is interest that you could be making, if you budgeted for the expense yourself and set the money aside until you needed to pay for the dental exam or the new glasses.)

Second, you're not vulnerable to capricious insurance company decisions about what's covered and what isn't. If you keep your money, you don't have to go to the insurance company and ask if they'd please give some back to pay your claim. After all, the other way the insurance company ensures its profits is to deny claims. They do that mainly by having complex rules that they constantly change.

For example, I used to always get my teeth cleaned in June and December. Then my dental insurance switched from covering two cleanings a year to covering one every six months. Having gotten my teeth cleaned in late June, it was impossible to schedule a December cleaning--the first half of the month was out, because it wasn't six months later, but with the holidays, there weren't any regular cleaning appointments left in the second half of December. So, my next appointment ended up being in January--after which, of course, I couldn't schedule my next appointment in June at all. Never mind that I'd been getting my teeth cleaned in June and December for 30 years. (A few years later they changed the rules again....)

There are similar rules for glasses. They'll cover frames, but only medium-priced frames. They'll cover lenses, but not the charges for over-sized lenses or progressive bifocals. They'll cover an anti-scratch coating, but not an anti-reflective coating. If you happen to want just what they'll pay for (and not want the stuff they won't), you can get full value--but you can do that by just keeping your money and buying your own glasses.

Of course, there's one big exception to all this: If someone else is paying. If you're getting optical or dental insurance as part of your employee benefits, it may well be a good deal. It's still a silly way to pay for getting your eyes examined or your teeth cleaned, but if your employer will give you a couple hundred bucks a year to do that, but won't just give you the cash, then you might as well take it. (And, of course, there are plenty of kinds of insurance that's worth buying: life insurance, health insurance, disability insurance, car insurance, travel insurance, etc.--because they cover the risk that something bad will happen.)

If it's coming out of your own pocket, there are two key questions:

  1. Is there a risk? If your cost is predictable, you don't need insurance, you can just budget for the expense and pay it yourself.
  2. Is the risk substantial? A small risk you can bear on your own--you don't get insurance to cover the risk that you'll drop your groceries while bringing them home, because it's a risk you can afford to take.

If there's a risk, and if it's big enough that you can't bear it on your own, then insurance is the answer. Otherwise, just budget the expense and pay it yourself. You not only get to keep the insurance company's profit, you make sure that you're the one deciding how to spend the money.

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Guest's picture

Some companies also charge less if you don't have insurance... I can get a contact lens exam for half price by paying cash. That's a $45 savings. Ironic, isn't it?

As for dental insurance, some dentists and oral surgeons will accept medical insurance for part of the bill. We still have to pay 100% for cleanings and fillings, but tooth extractions and anesthesia are covered. What a great surprise for us!

Guest's picture

If you have a choice for disability insurance your better off buying your own than getting it as a work benefit. If you get it through work any pay out is taxable. You are also bound by ERISA laws if you get disability insurance from work, this limits your ability to sue and how much you could collect if they fight paying it. So if people have a choice to maybe just get the cash from the employer that they would pay in on disability insurance, they might want to use that toward buying your own disability insurance. You also then have the ability to shop around and find a company with a good rating rather than being stuck with whomever the employer picked (usually just the cheapest).

Guest's picture

Great post and follow-up comments and so there are some debatable points. While it's possible that your might pay less paying privately, that is the exception not the rule. (Negotiating by paying for cash is a great idea, but most people won't do that and not all doctors will play that game.)

When you have dental insurance and the price of the insurance costs what you would definitely spend in routine cleanings, yet it also provides some catastrophic yet unexpected coverage, it can well be worth the premium. In this case, it works like the fire insurance example by spreading real risk. Of course the insurance company can expect to make a profit on most customers by holding your money before it is paid out and because most folks won't need expensive covered procedures, but that's the cost of your protection. Never risk a lot for a little is another insurance purchase mantra.

Still, insurance is over-sold. Just look at all the in-store warranties on things like printers. As if you'd want a three year old printer repaired in 2011 vs. getting a new one for less than replacement toner!

Guest's picture

You make a good point about what insurance is and isn't. I think HMOs have given everybody a warped sense of what insurance is supposed to do. Health insurance is not prepaid health treatment. Most people should be able to afford to pay to go to the doctor and shouldn't need a $25 copay. What they need insurance for is when they have a surgery that costs $30,000 or some kind of illness that racks up thousands of dollars in treatment costs.

The same with most dental and vision insurance. Most of the catastrophic dental and optical issues aren't covered by most of these wimpy dental and vision plans we have available to us anyway and will end up falling under our health insurance anyway.

My biggest pet peeve are extended warranties on consumer electronics. If you can't afford to replace your $100 ipod then you probably couldn't afford it in the first place and I think your life will go on without it.

Guest's picture

@Michael: you say that most people should be able to pay for medical care out-of-pocket, and there's no need for medical insurance except for catastrophes. I disagree. One of the more expensive medical expenses is childbirth, and people tend to have children early in their working life, when they have the least money. They also tend to have more than one child, and, in this time frame, they might also want to buy a house.

If this expense is spread out across many people, via insurance, or via socialized medicine, or something in-between, it's good for society.

The alternative would be to allow people to carry long-term debt for childbirth. Then, banks would be getting involved in this expense, and there's potential for a raft of problems associated with consumers choosing excessive services, or conversely, going with "discount childbirth."

@philip: great article, great premise.

Guest's picture

I have to disagree with this post in regards to dental insurance. Your analysis may work if you are fortunate enough to have strong teeth and for the most part are just talking about your yearly cleanings and an occasional filling. Many of us are not that fortunate. Dental procedures have become prohibitively expensive, even with insurance picking up part of the tab. Without insurance many people can end up with a serious debt or just can't have the work done. This can have further reaching general health ramifications. And, like it or not, we live in a culture that makes judgments based on appearances so it can also affect other areas of one's life. Maybe your cost analysis is accurate when looking at a total population, but for the individual who is stuck either in debt or without the proper care, that's not much comfort.

Guest's picture

Be wary of dental insurance as Dentists only tend to mention it after you've had a course of treatment. You then take it out but don't actually need it for the next three years.

One of the biggest rip-offs in the Uk is loan repayment protection insurance. The rates charged are disproportionate to the size of the loan and you'd be better saving the cash to pay off the loan early.

Guest's picture

Nice article here, but it's worth mentioning that GROUP health, dental, and vision insurance are for the most part no longer risk-based. While it used to be the goal of insurance carriers to pay less than they collected in premiums, most health insurance companies provide 'Administrative Services Only'. This means they pay claims out of an employer's bank account. The premiums paid by employees are to cover the administrative services and keep the employer's bank account full.

Also worth mentioning that these 'ASO' accounts are not subject to state law, only federal.

Guest's picture

My dentist knocks off about 10% for "PPO adjustment" to better align their fees with what my insurance will pay--that's 10% I'd have to pay if I were paying out of pocket.

It's also very important to calculate the total annual cost of your insurance, then subtract any tax you'd have to pay on it if it weren't taken out pretax. Then you can compare your cost to the cost of going without.

It turns out that my dental insurance costs me $55/year for my two exams, two cleanings and two sets of x-rays. My insurance is pretty good, but even if it weren't, the cost of paying for those things out of pocket after taxes would make insurance be a better deal even with a pretax premium four or five times higher.

Philip Brewer's picture

Thanks, everyone, for all the good comments.

Good point on dental insurance also covering things more expensive than fillings--root canals, crowns, extractions, and such can be expensive compared to routine care. So, the the extent that your insurance is covering that stuff, it is legitimate insurance that protects you against a risk.

Good call also, on the observation that HMOs (with their co-pay based model) were an important part of what wrecked the whole notion of what insurance is.

Guest's picture

Michael, I hate those extended warranties too! But I think the same principle applies -- cover what you can't afford to replace. I read in Consumer Reports that laptops are one of three things that it's worth buying an extended warranty for, and I was glad I followed their advice!

The one and only time I purchased an extended warranty plan was for my laptop. That $300 plan covered a $700 part that broke down less than two weeks before the warranty ran out. It turns out this particular make of computer was prone to this kind of problem. I wonder how many people got caught?

I can afford to replace my ipod (or do without it) if it breaks, but I couldn't afford to replace a computer so easily, and my schooling (when I bought it) and now my work depend on it.

Guest's picture

Insurance is risk management, but risk management can be applied to other disciplines in life.

Risk management in investing is usually called diversification. If you'd like to learn more about how you can diversify your investments check out:

Guest's picture

So here's a question for you all, which I can't seem to get an answer from either my dentist, oral surgeon, or Insurance company.

I am paying out of pocket for some cosmetic work for my teeth (extractions/implants/crowns) to the tune of $15,000+. My company dental plan is only covering part of this. If I were to have an accident and wreck this dental work, my understanding is that my company dental plan would not cover the cost to re-do it, since they didn't cover it in the first place.

I have asked my insurance company, my dentist and my oral surgeon if there is specialty insurance that I could purchase to offset this "risk". None of them have heard of such a thing, even though movie starts insure their smiles for millions. How can an ordinary person get this insurance, and is it worth it? In your opinion...

Guest's picture

Sorry, "Stars" not starts...

Philip Brewer's picture

Most of the movie-star insurance that you're talking about is bogus--they buy a policy mainly so they can issue a press release saying, "Our star's smile is so pretty we've insured it for a million dollars."  It's never expected that there'd be any claim.

One of the reasons I'm down on insurance for things like this is precisely that there's no way to know what will be covered and what won't be.  Having said that, if you're teeth are damaged in an accident, I would expect your regular dental coverage to pay to have them restored functionally.  The incremental cost over that to have them restored cosmetically as well would be quite small--if a crown is damaged, it has to be replaced for your bite to be functional, and once they're replacing a crown, the extra cost of replacing it with a cosmetic-quality crown is relatively small.

Rather than trying to insure your dental work (the loss of which is really just one of many bad things that might happen to you), you'll probably be ahead of the game to save and invest whatever you might have paid in premiums.  Then the money would be available for non-dental emergencies as well.

Guest's picture

I do have a substantial amount invested, which is one of the reasons I'm able to pay for this out of pocket. Now if only the stock market would recover...

Thanks for the advice! I appreciate it!

Guest's picture

A really interesting article! It rightfully describes risk the prime factor that should count most in deciding what to insure and what not to. When it comes to health, dental and optical insurances are worth insuring as they constitute two of the most sophisticated and hence risky organs of the body.

Guest's picture

To pay out of pocket for my medications each month, would be over $600. Paying just copays on meds is less than $100. Is there a plan to cover perscriptions and catastrophic health needs? I pay $1,400 monthly for my fam of 3 insurance coversge (no dental or vision) through my small biz.

Doing the math: yearly we spend approx $400 for Dr visits and lab copays, $1,200 on copays for meds, $500 misc and the $16,000 premiums (am I missing anything).
Total with insurance: $19,100.

To pay out of pocket: $1,500 Dr/lab, $7,200 meds, $1,000 misc.
Total Without insurance: $9,700.

Can I get catastraphic insurance to cover any large medical costs foe less than $9,000--and just pay for the "normal medical" needs myself.

Is there any tax advantages paying through the company?

Guest's picture

Insurance are the best protection we could avail for our future needs and demands that we might be thinking to be liable out of our capabilities then. Taking the risk is always at the front step of everything. Identification of our priorities and knowing our financial capabilities are the best practical way of acquiring the most beneficial insurance for us.

It's essential to be wise enough because no one definitely wants to invest on something of less returns and importance. Essential living that is. We risk on something that is in great value for us. Making our money worth is the term I believe.

Guest's picture

Life insurance for children is another controversial subject. Getting such cover is not a bad idea if you have the extra money for the premium payments or there's a family history of health problems. Otherwise, it would be more practical to set aside the money for your children's education.