Sometimes it feels like everyone in the financial space wants to create a new buzzword or phrase. You know what I mean – rentvesting, the bank of Mum and Dad, that sort of thing. But lately I’ve been seeing “self-insurance” thrown around a bit. It’s being referred to as an alternative to the traditional process of taking out a health insurance policy as a safety net. So what do you need to know about self-insurance, and is it worth it?
What is it?
Self-insurance is the process of putting money aside that’s specifically dedicated to health-related expenses. It’s essentially a rainy day or emergency savings account where the sole purpose is to cover unexpected health costs. Many people might do this in the form of a high-interest savings account, an investment or managed fund, or even by dipping into their superannuation (which can typically only be done as a last resort).
What’s the purpose?
Unfortunately, health insurance battles a stigma that it’s expensive and unaffordable. Because of this, the people who choose to self-insure think to themselves, “why spend money on health insurance when I can pocket that money and use it to cover health costs when they arise?” By their logic, they’re saving money by not spending it on insurance. They may even think they’re making money as in many cases they could be receiving interest on their savings. However this is a complete misconception.
Issue #1: Misaligned costs
Self-insuring may sound alluring but it’s likely that the people who are choosing to self-insure have no idea how expensive medical costs can actually get. In Australia, we’re lucky to have public healthcare which can contribute towards covering some essential and emergency treatments. But there are plenty of medical expenses that aren’t covered by Medicare and that can cost thousands. An unexpected hospital stay, a private hospital stay for pregnancy or other ongoing treatments can really add up, and not everyone’s savings can cover the costs.
Issue #2: No protection
Health insurance is there to be your safety net. Investing a consistent amount of money monthly or annually means that if something goes wrong, you’ll have that security there to help you cover the costs. In many cases, the health insurer can actually be billed directly by the hospital or practitioner. This can save the policyholder from having to cover the costs and then go through the claims process. Those with no insurance have less of an option of doing this.
Issue #3: No benefits
People who self-insure don’t receive any perks! Extras policies can be combined with hospital policies or even taken out on their own, and these can help cover ongoing costs as well. Trips to the dentist, optometrist, podiatrist, chiropractor and even massages can be covered. These can typically cost hundreds of dollars each on their own, but health insurance can cover the costs.
So can you really afford to self-insure? Probably not. It’s a nice thought and a great concept in theory, but in practice you never really know when a medical issue can pop up and how much it’s going to cost you. The reality is that not everyone can afford to fork out $35,000 on something like a heart bypass. It’s much wiser to take out insurance and be confident in the terms of your policy so that you know you’ll be covered if something goes wrong.
Bessie Hassan is a Money and Insurance Expert at finder.com.au, Australia’s most visited comparison website.