What is insurance? The defining feature of insurance is
paying a third party to take on catastrophic risk. Health insurance’s main and
original purpose was to protect you from incurring the expense of a
catastrophically expensive disease or injury. Homeowner’s insurance protects
you from the catastrophic risk of your house burning to the ground. Auto
insurance protects you from the catastrophic risk of a car accident. Those are
all uncertain events, hence there is a risk. You don’t pay to have your car
insurance cover tire rotations or oil changes. Your homeowner’s insurance does
not cover house-painting.
Not all forms of insurance are catastrophic, of course. When
I buy a $60 video game from GameStop they offer insurance on the game. For $3
they will replace the game if it breaks or gets damaged within a year. That is
clearly not catastrophic or traditional insurance. But there is clearly not a
need for catastrophic insurance for video games sold by GameStop.
Health insurance provides protection against the financial risk
of facing huge medical expenses which, in rare cases, can go into the millions
of dollars. Typically, the amount a policy pays is defined by deductibles,
coinsurance percentages and out of pocket maxima. If you suffer an illness or
injury, the amount that you have to pay for treatment is limited.
For some reason dental care is not generally covered by
health insurance. Therefore there are standalone dental policies. That would be
fine, except for the fact that dental insurance doesn’t provide the risk
protection that people want with insurance. A typical dental insurance plan has
a maximum benefit of $2,000 (or less) per person per year. One of the biggest
problems with this is that it will cover regular checkups, cleanings and
fillings, but once you need anything serious it gets maxxed out quickly and
won’t cover anything. Crowns, root canals and implants can all run into the
thousands of dollars -- each. So if you need a lot of dental work it can run
into the tens or even hundreds of thousands of dollars. That – and not the $250
checkup and cleaning -- is what dental insurance should be for.
That’s not to say that there are no benefits to having a
dental insurance policy. It can save you money in at least three ways:
- If you go to dentists who are in the insurance company’s network you pay discounted “in network” rates;
- If you are a “heavy user” of dental care, you may get more in benefits that you pay in premiums; and
- You pay premiums on a pre-tax basis and get benefits on a post-tax basis, thereby saving in tax.