We are frequently asked about individual health and dental plans and whether they make sense to have. And, as far as insurance companies go, by far the largest number of enquiries about products are for individual health and dental plans – shockingly not many people call in wanting life insurance! The reason for the interest is simple, we all have out of pocket expenses for dental, prescription drugs, physiotherapy etc. that we would like to pay a small amount as a premium to cover those larger bills. Unfortunately, the reality is that for most people they are going to end up paying a lot more in premiums than they will ever get back in paid claims.
In order to understand why that is we first have to look at the original concept of insurance. Insurance was originally developed to help people with catastrophic losses that were infrequent, but when they happened were devastating for the individual or family that it happened to. Along comes insurance where a large number of people could pay a small amount and pool their money together to “insure” that if they were the one that suffered the loss that they wouldn’t be financially ruined. And that’s where insurance works best, life insurance, disability insurance, travel insurance, fire insurance are all examples of where you pay a relatively small amount as premium to cover a risk that could be hundreds of thousands or millions of dollars. Contrast that to individual health and dental plans where you are asking an insurance company to pay for claims that are frequent, and for a lot smaller amount. When you are doing that a lot more of the costs ends up being administrative instead of actual “insurance”. Insurance companies are of course also not selling these plans out of the goodness of their hearts, so a profit component has to be built into the premium charged. All in all, on average, the insurance company will base their rates on what they estimate paid claims to be + roughly 40%. Put another way, if you get back from them $1000 in paid claims in a year, they are going to want to be charging you $1400 in premium. There will be winners in the mix, those that tick off the right boxes and hit enough of the various category annual limits will be happy, at least temporarily that they got back more than they paid, but in general a lot more will lose.
Then why does it work for company group benefit plans? For a few reasons. First of all, as the name suggests, it is a benefit that the company provides as part of the employee’s overall compensation package to attract and retain good employees. So, the employer is paying some or all of the premium, and the company gets to write off that cost as a business expense for tax purposes. There are also economies of scale that go into a group plan, and the cost per person or per family that an insurance company has to charge is a lot less for a company with 500 employees than it would be for a company with 10 employees – and the cost for an individual plan is going to be even higher.
So what’s the answer? For self employed individuals with their own corporations, we recommend Private Health Services Plans or PHSP’s. The fees are less and structured properly it is all deductible for the Company for tax purposes. Unfortunately, for anyone who doesn’t either work for an employer that has a benefits plan or has their own company that they can do a PHSP, the best option might just be to set aside an emergency fund to cover those larger expenses – and be thankful that we live in Canada where a majority of our health costs are covered by our government plans!
Paul Bajus
- CLU, CFP, CHS - is the Director of Director, Pensions and Corporate Wealth Management for BF Partners.
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