It’s open hunting season for migratory birds, white-tailed deer, small game and federal insurance benefits. The insurance season begins Nov. 13, and for federal employees and retirees, unlike game hunters, the choice of a target may not be so clear. Even for a professional (financial planner, not hunter), the choices and analysis of federal insurance plans are daunting, if not overwhelming. The type of analysis required is, quite frankly, beyond the capability of most decision makers. After all, it involves predicting the future, and no one can accurately perform that trick.
Even if you know what you’re doing, yours is ultimately an educated guess. I typically see two basic approaches to buying health insurance.
The first approach is to simply do what you did last year, or at least the closest available approximation. This is a reasonable approach if your original selection was based on sound decision making and your circumstances and expectations haven’t changed since your original selection was made. For instance, are you planning on adding to your family? Is this the year that you want to have elective surgery for your tennis elbow?
The second approach is to make your choices based on emotion or some other irrational process, such as “eenie, meenie, mynie, mo.
Going with last year’s choice or going with your gut without really looking at your options and needs leads to some common mistakes:
- Insuring against inconvenience.
It’s easy to fall into the trap of expecting your insurance to eliminate the need to make a payment when you need a covered service, such as a routine check-up, flu shot, or unexpected trip to the emergency room after your son flips over the handle bars on his bike. However, buying insurance to replace your checkbook is an expensive option. This is one of the reasons why health insurance costs so much.
Think about it: If an insurance policy offers coverage for expenses up to $1 million, that one-millionth dollar is the least likely to ever be paid and can be sold to you at a profit for a tiny fraction of its value. The first dollar of that $1 million, however, is the most likely to be paid. In the case of health insurance, insurers are virtually certain that they’ll be paying that dollar on your behalf. They are so certain, they’ll charge you the dollar, plus the cost of processing the claim and the payment. Buying insurance to cover that first $100, $250 or even $500 of medical expenses you may bear during the coming year will often cost you more than that amount in additional premium. It doesn’t make a lot of sense to pay $1.20 to get $1.00 in benefits.
Take a look at the difference between the standard and high options for many of the Federal Employee Health Benefit Program alternatives.
The main benefit of choosing the high option is usually lower co-payment rates or deductibles. For example, with Aetna’s Open Access plan in Virginia the lower-cost standard option, the co-payment for a doctor’s visit rises to $20 or $30 compared with the high option’s $15 or $20. Otherwise, the coverage limits are basically the same. However, the increased cost for the lower co-payment limit is about $1,200 per year. So, by electing the high coverage option, you commit to pay an additional $1,200 to save $5 or $10 per doctor’s visit. At this rate, you’ll need to see the doctor between 120 and 240 times during the year to recover your cost.
- Trying to cover every contingency.
If you are trying to insure against every possible eventuality, you’ll find it is a futile exercise. Insurers typically won’t do it, and if they did, it would be so expensive that no one would be willing to pay the premiums. Your mission in buying insurance is to cover the bulk of the unacceptable risk — the risk you can’t afford to bear yourself. Covering some of the risk is better than nothing. And obviously, the more the better. But insuring more than 80 percent or 90 percent of the risk is probably impractical or impossible. Buying a long-term care insurance policy with unlimited benefits is an example of over-insuring. It is highly unlikely that you will ever use more than six or seven years of covered care services. In trying to cover the worst-case scenario, you are paying for insurance you will likely never use.
- Buying coverage insufficient to meet your need.
I often see people using rules of thumb or instinct to determine the amount of insurance to buy. This would include choosing a life insurance limit that pays off a mortgage, for example, but could be insufficient to meet the financial need of a surviving spouse with dependent children.
Insurance is there for one reason: to reduce or eliminate an unacceptable financial risk — usually, a risk that would financially ruin or seriously handicap you or your family. If you can afford to spend hundreds or thousands of dollars per year on insurance premiums, then you can afford to cover that $500 or $1,000 deductible. If, in order to maintain a desired standard of living, your spouse and children would need $50,000 per year for 20 years, before taxes, to replace your income if you died unexpectedly, then $100,000 worth of life insurance is not enough.
The materials provided by the Office of Personnel Management on its Web site for open season — www.opm.gov — are an excellent resource. Take advantage of the information, use a calculator to determine your needs, and be rational in deciding how to make the most of your resources.
Don’t hide in the tall grass waiting for the best choice to walk on by. You really have to hunt for what’s best during open season.
Written by Mike Miles
For the Federal Times
Publication November 6, 2006