An example will be usefull in explaining this concept. Suppose, for the purpose of simplicity, there are two health insurance plans, identical in every respect, except for the difference in deductible. The first plan we'll use is the Blue Cross Blue Shield NC, Blue Advantage, Plan A. The 2010 premium for a male in the Charlotte area with a preferred rating for the Plan A with a $250 deductible and 100% coinsurance is $392.11 per month. The 2010 premium for a male in the Charlotte area with a preferred rating for the Plan A with a $500 deductible and 100% coinsurance is $350.10 per month. (By the way, both of these plans are very expensive, high benefit plans and are beyond what I recommend paying for health insurance each month.) Both of these plans are identical in every respect, except for the deductible and monthly premium. What we need to compare then, is the difference in monthly premium to the difference in exposure (deductible). We know that the deductible resets every year in January, so we multiply the premiums by 12 months and look at the difference.
Plan A $250 deductible: $392.11 x 12 months = $4,705.32
Plan A $500 deductible: $350.10 x 12 months = $4,201.20
So the difference in annual premium is $504.12. This means that you would pay over $500 a year to reduce your exposure by $250 per year. I never recommend paying more in premium than you reduce in exposure. In this case, I would recommend choosing the less expensive plan, and saving the premium. That way if you need to pay for medical claims you have the money. If you don't need to pay medical bills, you get to keep the money at the end of the year instead of spending it on premium.
The previous example was very simple and straight forward, but what do you do when the premium disparity isn't so pronounced? Lets consider another plan choice, the Blue Cross Blue Shield NC, Blue Advantage, Plan B. The 2010 premium for a female in the Raleigh area with a preferred rating for the Plan B with a $500 deductible and 70% coinsurance is $208.69 per month. The 2010 premium for a female in the Raleigh area with a preferred rating for the Plan B with a $3,500 deductible and 70% coinsurance is $112.09 per month. These plans are identical in every respect, except for the annual deductible and monthly premium. Again, we will multiply the monthly premium by 12 months and compare the difference in premium and annual exposure.
Plan B $500 deductible: $208.69 x 12 months = $2,504.28
Plan B $3,500 deductible: $112.09 per month x 12 months = $1,345.08
The difference in annual premium is $1,159.02 and the difference in annual exposure is $3,000. In other words, you would pay $1,159.02 per year to reduce your annual exposure by $3,000 per year. This seems like a difficult decision until we look at it as a decision of statistics. We divide $1,159.02 by $3,000 and we get 0.3864 or 38.64%. So, if we consider this decision over a period of years, we would say, if you meet the $3,500 deductible in 4 out of 10 years (40% of the time) then we should pay for the more expensive policy. In other words, if the chance of meeting a $3,500 deductible each year is more than 38.64%, then it makes sense to choose the more expensive policy. If the chance of meeting the $3,500 deductible is less than 38.64%, then it makes more financial sense to choose the less expensive policy.
For some people, the decision ends here. The numbers are the deciding factor. However, others may be in a financial position where they would not be able to come up with the extra $3,000 out of pocket. Or others would be distressed to have a $3,500 deductible instead of a $500 deductible. In my years as an insurance agent, I've learned that there are two components to deciding between health insurance policies. There is it's use as a financial instrument, strictly from a numbers perspective, and there is the peace of mind it provides. For some, it's worth the extra premium to lower the deductible so they are comfortable with their policy choice. In cases like these, I recommend spending the extra premium to provide peace of mind.
In summary,
1. Analyze the premium paid per benefit period against the value of that benefit.
2. Incorporate the "peace of mind" of a benefit into your decision. Consider if that comfort is worth the extra monthly cost.
