Strictly speaking, no one in New Zealand needs health insurance. New Zealand’s public health system provides immediate care with respect emergencies. As Martin Hawes says, “if your condition is life-threatening, health insurance is probably no great advantage – the public system can move quickly with good effect when a condition is serious enough”. It also covers most other important health issues, but this often requires joining a waiting list.

ACC also provides some level of protection. If a medical condition is from an accident, then ACC will be involved and is likely to pick up the bill. In short, ACC provides no-fault insurance cover for injuries resulting from accidents in New Zealand, even if the injured person caused the accident.”

Think about it this way. Compared to the United States, medical bankruptcy in New Zealand is essentially non-existent.

Health insurance can, however, provide funds so you can have your non-urgent health issues addressed sooner than they would through the public system. By having medical issues addressed privately, you can:

  • reduce additional suffering,
  • reduce the possibility of your health issue getting worse, and
  • expedite your return to work.

Health insurance can help with this.

Health insurance provides a degree of certainty

One of the reasons health insurance is attractive is because it provides you with a degree of certainty. Sure, the premiums can be expensive. But you experience peace of mind that you will be covered if something were to happen.

This is true to a degree, but it can’t provide you with complete certainty. The terms of every policy is different. For example:

  • Different policies have different limits per procedure or year.
  • Some policies allow you to go overseas for treatment and some don’t.
  • Some policies cover post-operative physiotherapy and others don’t.
  • Some policies cover non-PHARMAC funded drugs and some don’t.
  • Some policies include preventative/monitoring procedures and others don’t.
  • Some policies exclude certain life-threatening health issues (such as certain types of cancer) on the basis that you’ll be covered by the public health system, even if you’d prefer private treatment.

Are any of these individual differences going to matter to you? For most people, it’s impossible to know because you don’t know what is going to happen with your health.

Ultimately, most people won’t know whether they are covered or their exact level of cover until something significant happens to them and they either check the policy or start dealing with their insurer at the time they want to make a claim.

So even if you’re paying premiums for certainty, you still don’t have full certainty about what you’re paying for and the benefits you’ll receive.

An alternative to health insurance – self-insurance

An alternative to health insurance is self-insuring, which is taking some or all of the risk on yourself.

If you suffer a medical issue, you can always make an assessment as to whether it’s worth waiting on the list, or whether to pay for the matter to be addressed privately out of your own funds.

Many people self-insure simply because they can’t afford health insurance.

Many people who can afford health insurance consciously choose to self-insure as well. The rationale for this is that instead of paying someone else to take on the risk (ie, premiums), they would rather keep this amount, and pay for private medical services themselves should this ever be necessary. Most people who choose to do this are in a position where having to pay for these expenses would be inconvenient, but would not be financially catastrophic.

Health insurance is more difficult to provide personalised advice on than other forms of personal insurance such as life insurance, trauma/critical illness insurance, total and permanent disability insurance, and income protection insurance. The decision to take out health insurance is more personal, because it is ultimately a personal assessment of the likelihood that you will need cover, and the value and subjective piece of mind that you think you might receive from the certainty that health insurance provides.

On average, people pay more in health insurance premiums than they receive in benefits. It wouldn’t be commercially viable for insurers to provide otherwise.

Many people pay significantly more in premiums than they receive. However, there are some people who benefit significantly from health insurance. Whether your household will benefit from health insurance can only be known in hindsight.

You should aim to self-insure at some point in your working life

The older you get, the more expensive health insurance gets, because the major risk factor for most health issues is age. The cost of medical procedures also tend to increase at a rate greater than inflation, because medical interventions are becoming increasingly capital-intensive and expensive, which in turn increases premiums.

My firm belief is that if you’re in a position where you can afford health insurance, you should be in a position to aim to self-insure with respect to health matters at some point in your working life. The earlier you can get into this position, the better.

Considering the average cost for the following common procedures, recently published by Southern Cross:

  • Skin cancer removal – $230 to $3,800
  • Grommet surgery – $1,400 to $2,800
  • Cataract removal – $2,700 to $4,600
  • Tonsil removal – $3,200 to $4,300
  • Squint correction – $3,200 to $6,700
  • Breast cancer surgery – $4,000 to $14,400
  • Endometriosis surgery – $4,400 to $18,800
  • Varicose veins – $5,600 to $7,700
  • Prostate cancer surgery – $14,600 to $24,000
  • Knee replacement surgery – $20,600 to $29,100
  • Heart valve replacement surgery $44,700 to $62,200

These aren’t small figures, but when you consider the financial impact of having to pay for one of these procedures compared to, say, you or your partner dying or becoming incapacitated, or your home being destroyed by fire or earthquake, they aren’t catastrophic.

Broadly speaking, insurance is a tool best used to manage catastrophic risks. The less catastrophic the risk is, the more you should consider self-insuring.

There are degrees of self-insurance

It’s important to note that there are degrees of self-insurance. It’s not binary, in terms of having insurance and not having insurance.

You can, for example, have a high excess for claims, which means that you are self-insuring for minor matters and insuring for more expensive matters. Or you can remove options that you are less concerned about, so your insurance only covers those aspects that matter to you.

Having a high excess is a form of self-insurance

The higher the excess you select, the lower your premiums will be. Having a higher excess is a form of self-insurance. Essentially, you are self-insuring for costs under the excess, but holding insurance (and paying premiums) for any events that exceed the excess.

As a general rule, I recommend selecting the highest excess that you can afford with respect to any form of insurance. Having a high excess means you would be covered if you require private hospital treatment that is very expensive; expensive diagnostic procedures (if you have the specialists and tests option); and cover for very expensive prescriptions not otherwise provided by the public health system (if you select this option).

For any matter below the excess, you can make the decision whether to treat it privately out of your own pocket.

Another practical factor to consider when deciding on an excess, is thinking about when you want to have to deal with your insurer. Personally, it would need to be worth several hundred dollars at least before I would want to go through the hassle, even if the administration is minimal. Nor do I want to deal with the uncertainty of whether my claim fits under the terms of my policy.

You can self-insure by limiting the level of cover under your policy

Generally speaking, there are several tiers of health insurance. The less cover or tiers you include in your policy, the cheaper the premiums. In effect, you can self-insure against certain types of risks.

The basic, common tier is basic health cover, providing for private hospital treatment.

Beyond private hospital treatment, there are the following three tiers:

  • Dental and optical. My view is that most people who can afford health insurance can afford to self-insure with respect to dental and optical issues.
  • GP and prescriptions. My view is that most people can also self-insure with respect to GP visits. Prescriptions can be a little more ambiguous. Some prescription drugs can be expensive, especially if they are non-PHARMAC drugs. Some people might want to consider policies that cover non-PHARMAC drugs.
  • Specialists and tests. If you are inclined to buy health insurance, you may want additional cover relating to specialists and tests that don’t necessarily relate to private hospital treatments. This could, for example, include diagnostic procedures that wouldn’t be covered by basic health insurance or by the public health system.

The level of cover you want is ultimately a personal decision, and difficult to advise on.

The risks with self-insuring

Whether you will benefit from having a certain level of health insurance cover can only be answered in hindsight.

Self-insuring seems palatable when you think of health issues requiring cover being periodic, and the health issues you have as being discrete issues. However, there can be scenarios where a person can have compounding health issues, which start to occur regularly.

Health insurance could be beneficial in this sort of situation. Ideally, if this occurs other insurances (such as trauma/critical illness insurance, income protection insurance, even TPD insurance, if you have them) will come into effect, and the severity of the issues might be covered by the public health system.

Health insurance, like the other personal insurances, can also be harder to get on the same terms if you cancel and decide to get it again. This is because later policies may have exclusions or loadings resulting from any subsequent medical issues that arise.

Of course, Murphy’s law dictates that if you have health insurance you won’t ever need it, and if you don’t have health insurance, you’ll find yourself out of pocket for not having it.

Purchasing health insurance, and choosing the levels of cover, is something of a gamble. Unlike, say, life insurance, you can’t know what your situation will be if/when you need to claim on it. You simply can’t predict what health issues you might have and the severity of these issues. You may end up ahead or you might not.

When deciding whether to self-insure, it is worth asking yourself what you will regret more: claiming only a small proportion of the premiums that you’ve paid, or incurring substantial costs when you could have organised health insurance at some point.

If you’re prone to accidents or consider yourself or members of your family to be unhealthy, then having health insurance on more generous terms may also be useful.

Insurance isn’t the only tool for managing risk

Insurance is only one tool for managing risk. Insurance is a form of transferring some of your risk to another person, and paying them premiums for taking on the risk.

Insurance isn’t the only risk management tool that is available to you. Although many health issues are outside of our control, people make many lifestyle choices that either reduce or increase the likelihood of requiring medical care over the long-run. This includes eating well, getting physical activity, and minimising exposure to hazardous activities and substances.

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).