[Take higher deductible or stay with lower deductible medical insurance?
From 4/24/02 Radio Show. Values approximate for purpose of this example]
Everybody’s Uncle,
I am a private contractor. I pay $350 per month for a $5000 deductible medical insurance policy. I was offered the same policy with a $10,000 deductible for $150 per month. I am young, in good health, and anticipate no claims. Should I continue the $5000 deductible or move to the $10,000 deductible?
Whenever financially feasible, higher deductibles should be considered. If possible, put aside $5000 (or any presently affordable amount) of personal funds in a designated account.
Assuming you put nothing aside, your premium decreases by $200 per month. Depositing this $200 per month into a designated account accumulates to $5000 in only 25 months (2 years, one month), less if interest earned is considered.
This $5000 set aside can grow indefinitely by continuing to deposit $200 per month to the account. Money can be invested in CD’s or other principal guaranteed vehicles to improve growth. Higher deductibles can be considered as reserve grows. Deductibles are usually annual, a $5000 reserve covers only one deductible.
Lower deductibles should be avoided when possible. First Dollar Coverage is costly.
In the example above, if we assume a maximum insured value of $100,000 (including deductible), you are paying $350 per month for $95,000 of insurance. With the higher deductible you are paying $150 per month for $90,000 of insurance. In effect, you are paying $200 for the first $5000 of coverage and $150 for the next $90,000. You save $200 per month by setting aside $5000. Imagine a bank account that paid $200 per month on a deposit of $5000, a 48% yield.
In the long run, self-insuring and higher deductible can save premium dollars. Unless you are sickly or accident prone, the higher deductible makes sense.
The same general principal applies to all deductibles. Auto insurance should examined in the same manner for higher deductible savings.
Everybody’s Uncle
