Health insurance is it worth it?
In most cases, no. Private health insurance in Canada is costly and ineffective for its intended purposes. Below, I explain the truth about health insurance and 5 reasons why it shouldn't be used, from a business owner and employee perspective.
1. Private health insurance is not needed for planned, non-catastrophic events
An example of a planned, non-catastrophic event is your routine dental appointment. It is planned because most people schedule a teeth cleaning at least once a year. It is non-catastrophic because there is no severe risk involved. Most health and dental costs typically fall under this category.
Why is insurance not needed for these events? Well, let’s think about the definition of insurance. The purpose of insurance is to transfer individual risk away, into a collective pool, effectively nullifying the risk. In the case of insurance, it means paying a fee to an insurer, which keeps you within the collective pool.
Back to the example: there is little risk involved with a dental appointment. Furthermore, it is planned ahead of time. There is no point to insuring low risk, non-catastrophic, planned events. You are better off paying the costs upfront.
Now, you might ask whether there are other forms of insurance that are useful. The answer to that is yes, there are other types of insurance that are effective and necessary, such as car insurance or house insurance. On the small chance that your house burns down, then you will be covered. You need this insurance because you may not be able to afford the consequences.
But let’s cover all sides of the argument. Some people may have a tooth decay, which is unplanned. Well, there’s two reasons why health insurance still isn’t needed. First, it is a non-catastrophic event, so there’s no need to transfer away the risk. Secondly, most insurers will not cover this procedure anyway.
2. Private health insurance brings no value in exchange for its cost.
Over the years, insurance companies have marketed their plans over mainstream media, to encourage generation over generation that an insurance plan is necessary. This is not true. In most cases, you will save more money by paying for your medical costs upfront (out of pocket). There are more effective ways to save (we’ll talk about this in the last section).
Most insurance companies aim for a 60/40 split. This means that insurance only returns about $0.60 for every $1.00 in a premium paid, to the employees for their claimed health and dental benefits. The resulting $0.40 of each dollar paid in a premium covers costs to administer the plan. In other words, profit for the insurer.
3. Private health insurance has limited plan flexibility
With millennials entering the workforce and global borders opening, the workforce is becoming more and more diverse. What this means for employers is a workforce with differing needs and values. In order to combat this change, benefits should offer flexibility and choice. In most cases, an insurance plan comes with limited coverage, few eligible expenses, and many restrictions. When one employee claims more than the others, the collective team suffers from increasing premiums so that insurers can maintain the aforementioned 60/40 loss ratio.
4. Private health insurance is complex and hard to use
If you have ever tried setting up an insurance plan, you will know that there are many terms and variables which will confuse employees more than it benefits them. You are faced with fees like premiums, deductibles, copay, coinsurance and more. These apply at different times and reduce the amount of money that actually goes back to the employees. Additionally, your plan may not cover pre-existing conditions (ex. diabetic), in which case, those employees may be excluded from the plan. In some cases, the insurer might outright refuse coverage for the entire company.
5. There is an effective and affordable alternative to health insurance
Even for a small business, there is a viable alternative to cover health and dental expenses for you and your employees:
A Health Spending Account (HSA) is the best-kept tax secret for Canadian small business owners. It works by eliminating the tax on all your medical expenses and is 100% compliant with CRA guidelines. Through an HSA, employers can designate custom allotted allowances to their employees. Employees can use these 100% tax free funds on any health-related (eligible) expense. That can range from a new pair of prescription sunglasses to massages to a visit to the dentist. An HSA plan provides flexibility for employees and cost savings for employers. It has no premiums, deductibles, copay, or complex terms. Pricing is simple. To learn more, check out our Beginner’s Guide to a Health Spending Account below.
If you own a business with no arm's length employees (ex. contractor), click below instead:
I hope this article has helped you understand a bit more about private health insurance in Canada. To get a better comparison between health insurance and a Health Spending Account, check out these quick reads: