Most people have health insurance coverage during their working years, but their employer picks up at least some of the cost. For retirees, the economics of buying similar coverage may not add up. Here’s why.
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Workplace health and medical coverage is a common employee benefit but, for many Canadians, retirement means an end to supplementary health insurance coverage. Some lucky retirees have ongoing coverage as a continuing benefit paid for by their employer, although sometimes even retiree coverage is optional and paid for by the individual.
Whether a retiree is considering an optional retiree policy, a group policy from a professional body or alumni association, or a separate individual policy because they are no longer covered, making a decision about health insurance can be a critical part of their retirement planning.
To make an informed choice, it is important to understand what health insurance covers. Prescriptions, dental visits, paramedical services (massage, chiropractic, podiatry, etc.), and eyeglasses are commonly covered under group and individual plans. That said, there are often limits to annual and sometimes lifetime coverage, such that only so much money can be paid back by the insurer in return for your and other plan members’ premiums.
In Canada, some forms of insurance are more important than others. You need car insurance by law throughout the country. You need home insurance to get a mortgage, and most people would agree that even without a mortgage, home insurance is a must. If you have dependents who rely on you, life insurance to replace your income if you die is prudent. Whether you have dependents or not, disability insurance is crucial to replace your income if you cannot work and earn a living. Critical illness insurance, errors and omissions insurance (for my business), and other coverage may be appropriate in certain situations. I have each of these types of insurance myself.
Health insurance, however, is an optional type of insurance—and for many retirees it may be unnecessary. Let me explain why.
Health insurance costs vs. benefits
While this is an imperfect example, bear with me and imagine a game of chance. Someone is going to flip a coin and the only outcomes are heads or tails. The coin flip will happen only once, and you must wager $1. The only results will, therefore, be winning $1 or losing $1.
Now imagine an insurance company offers you an insurance policy that will replace your $1 if you lose. The cost is 20 cents. If you buy the policy, the only outcomes are winning 80 cents ($1 less the 20-cent insurance cost) or losing 20 cents (the 20-cent insurance cost to protect your potential $1 loss).
The best outcome is worse than if you had not purchased the policy (winning 80 cents instead of $1), but the worst outcome is not as bad (losing 20 cents instead of $1). The outcomes are less extreme, but your best-case scenario won’t put you further ahead than not buying the insurance in the first place.
Obviously, losing $1 will not make or break you, but having your home burn down or losing a family’s breadwinner may be devastating without insurance.
Once again, this coin toss example is not entirely fair, but it is helpful perspective. Health plans have limits, say, up to $500 per year of chiropractic sessions or $250 for prescription glasses every two years. Insurers will base their premiums on the likelihood of a policyholder making claims, as well as on the total benefits they are likely to pay out (which are capped), all the while ensuring (rightly so) a profit for them.
Over a 25-year retirement, if all retirees received more in benefits than they paid in premiums, the insurer would go bust. On that basis, the average retiree should come out ahead paying health costs out of their own pocket. One exception may be a retiree plan that is partially funded by an employer.
My mother had an individual health insurance plan. Every few years, as the premiums rose, she would ask whether she should renew. I would subtly encourage her to cancel the coverage, and she would stubbornly renew it each year.
She no doubt paid more in premiums than she ever got back. But it gave her more peace of mind to pay predictable monthly premiums and get some benefits back from the insurance company than to pay sporadic out-of-pocket expenses. There was a psychological benefit to having the policy for her, although the math was never in her favour.
When my mother developed a terminal illness, she required significant care, particularly in the last six months of her life. Her prescription drugs, most of her equipment, and even some or her caregiver costs were covered by the provincial government. That is not to say that someone else’s prescriptions, equipment, or nursing costs will be covered, but it is important to consider that some of the most significant retiree medical costs—such as personal support workers, nurses, and other caregivers—generally will not be covered by a supplementary health insurance plan either. Long-term care insurance is an option in this case, but that is a column for another day.
In summary, health insurance is an optional type of insurance. It’s a nice employee benefit and one that has become commonplace in Canada, with four out of five working Canadians and their families covered by health insurance plans, according to the Canadian Life and Health Insurance Association.
Should a retiree buy health insurance in retirement? I advised my own mother against it, and bless her soul, she did not listen to me. You don’t need to listen to me either, but I am sharing with you the advice I would (and did) give to my own mother when she was alive.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.
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