Americans spend more than $1 trillion every year to insure their health, their homes, their cars and more. And each year, many of those Americans are left wondering why their insurance adds interesting perks but won’t cover their claims…their rates keep rising…and no insurer seems to offer reasonable coverage for certain risks. Insurance is supposed to protect us against financial risks and provide peace of mind—but instead, policies often leave people perplexed and infuriated. Here are four insurance-sector secrets that you should know about…
That gym membership included in your health insurance isn’t to keep you healthy. Many health insurance and Medicare Advantage plans include free or heavily discounted gym memberships. But: Insurers don’t do this to help enrollees become healthier and incur fewer medical bills. In fact, monetary-based employer incentives such as gym memberships don’t usually help people start going to the gym. Reality: Insurers offer this because the insurance shoppers most likely to be enticed by free gym memberships are already fit and healthy.
What to do: Lean toward health insurance options that include gym memberships, all else being equal—even if you suspect you’ll never go to the gym. These insurers can afford to offer policyholders better benefits than other plans because they tend to attract healthy applicants, who are cheaper to insure.
Pet insurance is never very good. Take a close look at a policy that promises to provide health coverage for your pet, and you’re likely to conclude that it isn’t worth the cost. Extreme example: A policy for a 12-year-old bulldog costs more than $4,300 annually but pays out only $5,000 per year.
Insurance is economical only when consumers buy coverage even though they don’t expect to use it often, as they do with homeowners and auto insurance. But that’s not the case with pet insurance, which suffers from a problem called “selection” within the industry. Many pet owners who buy pet insurance have unhealthy pets and/or are willing to try any treatment option that offers even a slim chance of extending their pets’ lives. Result: Pet-insurance providers price their policies as if everyone who enrolls is one of these expensive-to-insure customers. The only way insurers can offer pet policies with affordable premiums is to include low coverage limits, massive coverage gaps, long waiting periods and other restrictions.
What to do: Pet insurance might be worth its high cost if you believe that your pet is likely to endure lots of expensive health issues and/or you will do everything possible to keep your pet alive. If not, take the money you would have used to pay premiums and fund a savings account to cover the vet bills.
Dental insurance is doomed to disappoint. It doesn’t seem like dental insurance should suffer from a selection problem—virtually everyone is at risk of incurring sizable dental bills. The problem is that many expensive dental procedures can be delayed for months, so people often wait to enroll in dental coverage until their dentists warn them that expensive procedures are on the horizon. Result: Many dental policies cover routine cleanings and inexpensive procedures fairly well…but pricey and less common procedures very poorly, if at all. That is exactly the opposite of what insurance is supposed to do.
What to do: Dental insurance offered by an employer might be worth its price if it’s well-subsidized by the employer. But read the details carefully before signing up so you understand what is and isn’t covered and what waiting periods and other restrictions apply. If dental coverage that does cover big bills fairly well is available to you but is expensive, schedule your dental exams for shortly before your insurance annual open-enrollment period and ask your dentist to give you as much advance warning as possible about procedures that you might need down the road. Depending on the policy’s terms and your dental needs, you might be able to sign up for coverage and wait out its waiting periods without endangering your dental health.
Life insurance and annuities are priced for lifespan outliers. If you’ve ever applied for life insurance, you likely were subjected to medical tests and were required to fill out a lengthy questionnaire about your health history, hobbies and habits. After all those tests and questions, you probably thought that the insurer must have all the info necessary to predict your longevity and price your life insurance policy accordingly. But surprisingly, it didn’t.
When an economist now at Swarthmore College examined the data, she discovered that, despite all the information life insurers collect and statisticians and software they use to analyze it, life insurance consumers still somehow have a better sense of their own likely longevity than insurers do. Result: Based on her research, consumers who decide to buy life insurance tend to somehow know that they’re likely to die sooner than the insurers expect.
Result: Insurers know this issue, so to protect themselves, they set premiums on the assumption that every applicant will die somewhat sooner than the medical tests and questions predict. This makes insurance overpriced for consumers who simply want it for peace of mind or financial-planning purposes.
This problem is more pronounced for insurance companies that sell annuities, which provide monthly payments as long as the policyholder is alive. The longer an annuity buyer lives, the greater the odds that the insurance company will take a financial loss—but insurance companies typically price annuities based only on the applicant’s age and gender, without any medical tests or lengthy questionnaires. Thus, an annuity buyer who comes from a very long-lived family and/or who lives a safe, healthy lifestyle has a huge advantage over annuity sellers. So annuity sellers price their annuities on the assumption that every buyer will outlive the actuarial tables.
What to do: If you want life insurance but don’t expect to die anytime soon…or you want an annuity but don’t expect to live exceptionally long…lean toward the policies and annuities that longevity-outlier consumers tend to shun. Examples: An annuity buyer might select a “period certain” annuity that’s guaranteed to make payments for a predetermined number of years rather than based on life span—a buyer who expects to live a very long life wouldn’t choose that option. Or a life insurance shopper might select a policy that has a long waiting period before death benefits begin. Insurance products such as these often offer better terms.
Similar: Choosing policies that signal insurers that you don’t expect to make many claims can lead to significantly lower rates with other forms of insurance, too. Example: Insurers tend to offer the best terms to home and auto insurance shoppers who select policies that have large deductibles. Not only do these deductibles save insurers money, people who buy these policies send the message that they don’t expect to make claims.
