compromise between 100% insurance and no insurance? (long term view)

Question

Assume you can get private health insurance for different premiums, and they cover any directly health related costs (hospital stay, needed medicines, physiotherapy etc.) up to a maximum amount. It is valid for one year, and after the year is over you are free to give up, or renew that (or any other) option.

so you may have options of:

• pay $10 monthly, and be insured for up to $500 in medical costs
• pay $30 monthly, and be insured for up to $1500 in medical costs
• ...etc...
• pay $140 monthly, and be insured for up to $7000 in medical costs
• pay $160 monthly, and be insured for up to $8000 in medical costs
• pay $180 monthly, and be insured for up to $9000 in medical costs
• pay $200 monthly, and be insured for up to $10000 in medical costs

(those are not exact numbers but examples, but assume average monthly income is less than $1000 over here, so $200 would be significant amount of money, even if health is priceless)

If one is healthy during whole year, any insurance money is completely wasted. Of course, if one acquires serious health problems, it is very well invested money.

So on one side of the spectrum, one can have no health insurance, and cover all expenses (if they happen) from "Rainy day" fund. On another side one can pay maximum $200/mo, and while having a peace of mind and not having to worry about medical costs it wastes huge (for me) $2400 each year (which could have gone to savings) for as long as you live, and leaves nothing behind.

Now one could compromise by taking, say, $50/mo option, which would provide some coverage (but not enough for serious health problems), while "wasting" smaller amount of money. Not ideal in either case.

Another option which strikes my mind would be to spread it over time in insurance and savings to have almost same amount of protection for same amount of money, and still have money saved later if you had not have big medical issues (and at worst be as same as you had only max insurance).

• so 1st-4th year you would pay $180/mo to insurance (for $3600/year), and $20/mo ($240/year+any interest) to dedicated savings account. While it would provide little less coverage in case of health problems, it would also accrue some savings.

• in 5th year you would have >$960 in savings, so with insurance of $180/mo you'll be close or over max ($200/mo) $10000 coverage equivalent ($9000 insurance coverage +$960 savings + interest) - just as if you have been paying $200/mo premium.

• in 6th-9th year, if you continue paying $180 insurance + $20 savings regime, your savings will be at > $1920, allowing you to further reduce insurance pay.

• in 10th year you'd be able to pay only $160/mo insurance for maximum $10000 coverage equivalent, as insurance would pay $8000, and $2000 would came from savings. That would leave you $40/mo to put in savings, which would further accelerate savings increase rate.

• in 12th year, for $10000 equivalent coverage, you'd (with any interest) have more than $3000 saved, allowing you to to reduce insurance to $140/mo and saving to $60/mo, further accelerating speed at which savings grow.

• it continues, until at some point in the future, you'd had > $10000 in savings, and could remain on $10/mo insurance and $190/mo savings (or even drop insurance and just keep putting $200/mo to savings).

Now, I understand it is not perfect, and there are caveats of course:

• if you ever get serious health problems and use up all the savings, you have to start from scratch (or revise your strategy, maybe going for just insurance if it is likely you'll continue with serious health problems)
• for first 4 years you only get 90% coverage ($9000 max instead of max $10000 coverage)
• I am probably biased as in first 40 years I've not had serious health problems, and it is likely I'm going to have more of them in the future, but it still might work out nice (although it probably would work much better if I thought of it 20 years earlier)

But otherwise it looks like promising strategy. Have I missed anything important? Are there better options?

Answer 1

I think you are addressing it the wrong way around. Insurance - in its basic idea - is supposed to protect you from exceptional and potentially life-changing financial situations; not from day-to-day cost. That means that covering the first 1000 $ is pretty much useless; for any serious sickness the insurance would be without merit.

For example, it makes sense to insure your house against fire; the premium is small compared to the potential damage, which works because the chance of a fire is also small. If you extend a fire insurance to cover dropped glasses, or broken TV sets, it becomes quickly a bad idea - chances for these events are higher, so insurance cost go up (and the events are easier to fake too).

Insurance should cover the large damage with low risk, never the small damage with more risk. The only reason the latter exist is that people don't understand it, and insurances make money on it, so they offer it.

Apply this to your insurance idea, and the right way would be: Pay 50 $ to cover any cost over 10000 $;
Pay 100$ to cover any cost over 5000 $;
Pay 200 $ to cover any cost over 2500 $;
And so on (all numbers are taken from thin air as an example).

I would love if there is an relatively cheap insurance that covers anything above 10000 $ (or even a higher threshold); they don't exist because there is not enough money to make for insurance companies.