The Risk of Losing Your Health Insurance By Michael L. Crifasi, CFP March 5, 2004 ® In selecting health insurance, a person must understand the various risks associated with the different types of insurance available today. All insurance is not equal. Each type of insurance has its strengths and drawbacks. The wrong health insurance choice can place your financial future in severe jeopardy. As a financial planner, I believe the most important criteria in selecting your health insurance should be to minimize the risk of losing your health insurance. Unfortunately, most people incorrectly make their decision based on low cost, whether or not a certain doctor is included in the plan or other less critical financial decisions such as whether to choose an HSA, Indemnity, PPO, or HMO plan. Unfortunately, until our lawmakers get their act together, most of us are forced to live with inadequate protection. For historical reasons, the tax laws encourage people to purchase the wrong kind of insurance. The tax laws were designed to encourage business owners to take care of their employees at a time when people worked for the same company for life. Unfortunately, our society is now so mobile that most of us will change jobs many times during our working years. To understand why Health Insurance premiums are spiraling out of control, see my paper titled “The State of Our Health Care System.” Employers, insurance trusts and insurance companies can all fail, or you can lose a job at any time for health, family, personal and other reasons. Every time you change jobs you run the risk of losing your health insurance until you turn age 65 and are eligible for Medicare. If you are uninsurable and are under the age of 65, you may be forced to go to work for a large company in order to obtain health insurance. Many people who consider themselves to be healthy may be uninsurable and don’t even know it. Someone who has had a heart attack or an organ transplant is uninsurable, regardless of how long ago. A sampling of health conditions that may cause someone to be declined for health insurance include: obesity, insulin diabetes, stroke, memory problems, Parkinson’s Disease, Alzheimer’s, and Sleep Apnea. Many other conditions can leave you uninsurable, especially if you are a smoker with additional health conditions such as Asthma. Even if you are eligible to purchase health insurance, there are many conditions that may result in a rating, which can increase the cost of health insurance by 15% or more, or may be excluded from coverage altogether. Such conditions include problems like high blood pressure, back disorders, or nervous disorders. (Specifics depend on your state of domicile.) In any event, I strongly recommend that you evaluate your level of risk when choosing a health insurance policy. The various types of health insurance plans are listed below in order of increasing risk. I strongly recommend that you evaluate your level of risk when choosing a health insurance policy. The various types of health insurance are listed below in order of increasing risk. 1. Lowest Risk - Large Corporate Plan: Most large corporations offer low cost insurance to their employees because of very favorable tax law. Usually, the plans offered by the Corporation are very good and allow the employee to purchase the health insurance plan that best meets the employee’s needs. The problem with employer provided health insurance is that the loss of your job can result in the permanent loss of your health insurance. Corporations must offer COBRA, but this can make the problem worse. A person may be perfectly healthy when they lose their job and decide to take advantage of COBRA while they search for another job. Unfortunately, at any time, a person on COBRA can develop a health problem that makes them uninsurable once COBRA ends. An uninsurable person runs the risk of impoverishment before they reach Medicare age. The insurance carrier may allow you to convert the group coverage to an individual policy. If the Insurance Company o the employer should go bankrupt, the Federal Government or the state r may offer you a special insurance pool or may force another insurance carrier to accept you regardless of health issues. 2. Low Risk - Personal Plan: A personal plan from a high quality Insurance Company is the best form of protection. A personal plan is a contract between you and your insurance carrier instead of a contract between your employer and the carrier. Therefore, you won’t lose your insurance when you change jobs. If the Insurance Company should go bankrupt or stop doing business in your state, the Federal Government or the state may offer you a special insurance pool or may force another insurance carrier to accept you regardless of health issues. Health insurance premiums are 100% deductible for people with self-employment income. For those without self-employment income, the premiums may be deductible on Schedule A, subject to significant limitations. The new Health Savings Account (HSA) is a tremendous advance in the concept of personal health insurance for everyone. For the first time all taxpayers are allowed to deduct some of their health care costs. Congress must have been asleep when HSAs were surreptitiously attached to the 2003 Medicare bill and amazingly signed into law. HSAs are available for anyone who has an approved high deductible health plan as their only health care plan. (Individuals must have an annual deductible of at least $1,000 with an out of pocket maximum up to $5,000; and, families must have an annual deductible at least $2,000 with an out of pocket maximum up to $10,000). In 2004, up to $2,600 of eligible cash deposited into a HSA is deductible for individuals and up to $5,150 for families. In 2004, individuals over the age of 55 can contribute an additional $500, increasing by $100/year until it reaches $1,000 in 2009. The funds in the HSA can be used to pay for deductible expenses with tax-free dollars. 3. High Risk - Small Group Plans: Employers with less than 50 employees can purchase a small group plan from an Insurance company. Because of the small number of employees in a group, if one or two employees develop a severe health condition, the cost of the premiums can be driven up to the point where the employer can no longer afford the premium and is forced to drop the plan. The loss of your job or the loss of the plan can result in the permanent loss of your health insurance. The insurance carrier may allow you to convert the group coverage to an individual policy. The Federal Government or the state may offer you a special insurance pool or may force another insurance carrier to accept you regardless of health issues. High Risk - Insurance Trust Plan: These plans look like a low cost way of obtaining group coverage. The Trust purchases the underlying insurance from an Insurance Company, and hopes that the premiums stay low. Trusts sometimes selfdestruct after a period of time, as the healthy people purchase lower cost policies and the Trust’s expenses start rising. As the premium increases, more healthy people find other insurance, and eventually only unhealthy people are left in the trust. If the premiums rise to the point where they are unaffordable, all the unhealthy people could wind up in the ranks of the un-insured. There may not be any protection for the insured if the Insurance Trust fails. 4. 5. Very High Risk - Short Term Medical Plans and Student Health Plans: These plans are intended to provide interim coverage for people between jobs and students who can’t afford a better plan. The risk is that at the end of the coverage period, if an uninsurable condition exists, the person could be without insurance until they reach Medicare age or become impoverished and qualify for the Medicaid welfare program. Insurance Scams: There are an increasing number of insurance scams being reported around the country. Unscrupulous agents and/or fraudulent trusts collect the premiums and don’t send the funds to a reputable insurance carrier. Eventually, the claims are rejected and the insureds are left with the bills. If an uninsurable condition exists, the person could be without insurance until they reach Medicare age or become impoverished and qualify for the Medicaid welfare program. Check to ensure that the agent and the insurance plan are properly licensed under the laws of your state before purchasing coverage. Remember, if the deal is too good to be true, it probably isn’t. 6.