Ask the grumpies: whether or not to purchase insurance

H.I.P. Person (Home Insurance Purchasing Person) asks:

How do you decide if you need insurance for something? We are updating our home owners coverage and they are peddling the following:

1) service line coverage –  up to $10,000 per event
2) systems coverage (a/c, hvac, water heater, furnace, and the like) – up to $50,000 per problem
3) sewer back up (?? not sure of max coverage)

We live < 75 miles from the coast; <20 miles from two major water coastal inlets but  not in a flood zone. What hurricane related insurance should we own? The policy comes with wind/water but not flood and they don’t really want to sell us flood (they are offering #3 instead).

Are any of these worth it?  What price point would make them worth it or not?

DISCLAIMER:  We are not financial advisors.  Get advice from real professionals or do your own research before making important monetary decisions.

So in economics, you purchase insurance when the expected utility of the insurance is greater than the cost of the insurance.  So, assuming you knew how your utility function was shaped (the important part for this purpose is that you know your coefficient of risk aversion, in this case specifically how much you hate the possibility of loss), and you know the probability of a bad thing happening, you just multiply that probability by your expected utility plugging in the amount you’d be out if the bad thing happens and then add the probability that the bad thing doesn’t happen and multiply that by your expected utility plugging in the amount you’d have if the bad thing didn’t happen.  Problem is… in reality, we usually don’t know the probabilities of these negative events occurring (or even what those negative evens could be!) and we definitely have no clue about what our utility functions look like.

So how does one decide what to get insurance on in reality?  Well, if you have rough ideas of probabilities, you can look at the expected value of something happening.  Expected value is like expected utility, but it tells you what the break-even point is assuming you have no emotions.  You’re neither a gambler nor risk averse.  But risk averse you can look at those numbers and think to yourself, “How do I feel about this calculation?”  In general, the insurance company is out to make money, so they’ll be charging more than the expected value of the thing happening, but does the amount more that they’re charging seem reasonable to you?

If you don’t know the probabilities of something bad happening, you can still play with worst case scenarios:  If the bad thing happens, what would you have to pay out of pocket to fix it without insurance?  What would you have to pay out of pocket with their insurance?  Is the peace of mind for the difference between those two numbers worth what they’re charging?  (And again, if you have rough ideas of how probable these events are, you can factor that in as well).

Another thing to do is to google around, preferably with reputable sites, to see what kinds of insurance are usually a good idea and what kinds are generally scams.  You can ask people around you too, though people often do things that don’t make sense if there’s good marketing on the part of the insurance company or if they’re more credit constrained or risk seeking than you are.

An important thing to note is that you want insurance to insure against risk.  You don’t want it as a pre-payment for things you’re going to pay for eventually.  You don’t want a high monthly cost if you can avoid it by sharing some of the pain should disaster strike through a higher deductible.  The goal isn’t to save money, it’s to smooth your consumption over good and bad states of the world.  Don’t try to beat insurance– in the best states of the world you give them money and they never give you money.  But you want it there when disaster strikes if you can’t handle the disaster on your own.

If it were me, I’d definitely eschew the service line coverage unless it was really cheap– we can afford a 10K emergency.  Since the limit is capped, it is not actually useful insurance unless paying up to 10K would be devastating.  (Capped insurance is often a red flag– if they stop paying after a certain amount is spent you may be better off self-insuring because if something really terrible happens they’re not going to be much use, and self-insuring means you’re not paying for the additional administrative costs of going through them.)

Systems coverage again, we probably wouldn’t pay… replacing a/c, hvac, water heater, furnace etc. is all stuff that has to get done some time anyway (and none of these should cost 50K, unless that’s including the damage after a water heater explodes or something) so paying them is like pre-paying for bills you’re going to have, but it is likely you’re going to have less choice about how to make those replacements and you’ll be paying their administrative costs over what you’d be paying if you did these things yourself.  And, again, it’s capped.  This is unlikely to be good insurance.

Sewer back-up is the only one of these that doesn’t sound 100% scammy.  Check all your other insurances to see if this is covered under them.  Estimate how much a sewer backup could destroy.  Make sure that it’s unlimited covered and not capped and there are no other strings attached.  Think about the probability of this happening.  Look at how much they’re charging for it.  Then go with your gut.

We have no idea about hurricane insurance.  The internet has a bunch of pages about it, noting you should get wind and flood on top of home, but I’m not getting a good idea of what numbers you should be looking at or even how to make that calculation.  You may also want to look into the different deductibles they offer, because none of these sound particularly cheap, but it may be that if you have a high deductible the insurance cost will be more reasonable (assuming you can afford the deductibles).

Good luck!

Grumpy Nation, do you have any better advice for H.I.P.?

 

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An urgent email from Indivisible re: AHCA

The following is an email from Indivisible

Just as a preface: we don’t normally send “Help! The house is on fire!” emails like this because they can seem fake and alarmist. But we feel the tone of this email accurately represents how dire the TrumpCare situation is right now. Forgive the urgency—we promise to do this rarely.

What’s in this “new” TrumpCare bill.

After weeks of total secrecy, this morning Senate Majority Leader Mitch McConnell released the Senate TrumpCare bill. And what a cruel, ugly bill it is. It destroys Medicaid, it increases health costs for the middle-class families, it cuts coverage for pre-existing conditions, it eliminates funding for Planned Parenthood…and it does this all in order to green-light a massive tax cut for millionaires and billionaires. Oh, and it will likely get worse once it gets to the Senate floor.

But this isn’t over yet. Senate Republicans don’t have the votes…not yet. We have time to fight back, and it doesn’t matter if you have a Republican or Democratic Senator—you are needed in this fight. Here’s how to fight back.

People don’t realize how dire this is. We’re trying to get the word out to amp up public pressure on Congress NOW by launching a digital campaign to turn out more people against TrumpCare. Join us.
 Increase the pressure today 

How the TrumpCare fight will play out

Senate Republicans have promised a vote by the end of next week. But there are still several steps between now and passage of TrumpCare. Here’s how the former congressional staff at Indivisible Team think the fight will unfurl:

  • Tomorrow, we’ll get a Congressional Budget Office (CBO) score, which will quantify exactly how many millions of Americans will be screwed by this bill and in what ways.
  • On Monday or Tuesday, Republicans will officially announce the vote is happening by the end of the week and start debate on “the bill,” which is just a draft bill intended to make it look like they’re being transparent but in reality is a trick to hide just how awful their finished product will be.
  • Over the next couple days, Senators will submit amendments, most of which will fail and none of which would make this bill redeemable.
  • On Thursday, the Senate will plan to vote on the legislation, but first they will vote on all submitted amendments (known as “vote-a-rama”).
  • At the last possible minute, Senate Republicans will replace the entire bill they just got finished “debating” with an alternative TrumpCare bill secretly crafted behind closed doors.
  • By the end of Thursday, there will be a final vote in the Senate.
  • As soon as that same Thursday, the House may then pass the legislation and send it to Trump to sign. This could take longer, but this is the worst case scenario and quite possible.
  • Next weekend, one week of congressional recess begins. They’ll either have the bill done by then, or they’ll have to wait another week.

Throughout this process there will be precisely zero public hearings in the Senate. Make no mistake, this is a historically partisan, secretive, and undemocratic process for one of the most consequential pieces of legislation of our generation. This is atrocious.

So let’s fight it. All you need to pressure your Republican Senators, including DAILY scripts and new materials, is on our TrumpCareTen.org website. Need more background materials? We’ve got ‘em for you here. It’s critical that you’re showing up and that when you’re not showing up, you’re calling your Senators every single day.

TrumpCare Facebook Live tonight!

Join Indivisible for a special Facebook Live TONIGHT at 8:30pm ET. We’ll give an update on where the legislation stands and answer your TrumpCare questions.

Don’t like this TrumpCare bill? Help us amend it ASAP

Got a Democratic Senator? You’ve still got work to do. As mentioned above, one of the final stages of the TrumpCare bill is a little-known process known as “vote-a-rama” where ANY Senator can submit as many amendments as he or she wants. And here’s the thing: EVERY amendment takes time to be introduced and voted on. We’re collecting THOUSANDS of amendments and submitting them directly to Senate staff.

Please please please: submit your amendments here, and get your friends and family members to submit amendments. We know this is working already. Senators are reading these amendments on the Senate floor. But we need thousands more.

This is about applying your constituent power directly to the process. This tactic can delay the bill and make it more politically painful for Republicans to move forward. It’s not a silver bullet- McConnell and Senate Republicans can still blow up Senate rules and cut off the amendment process. But to do that they’ll have to go on the record literally silencing the victims of TrumpCare in their own states, which they really don’t want to visibly do.

We’re amping up the pressure, giving us money will help

Here’s the hard truth: McConnell’s strategy of secrecy is working. National and local press aren’t covering the TrumpCare fight, so fewer people know about it. That means there’s less public pressure on Congress, and it’s easier for Senate Republicans to move forward. If we drag this TrumpCare bill out into the light, it will rot. That’s our job right now.

We’re trying to get the word out ASAP. We’re running a comprehensive digital ad campaign around the country that’s reaching new people and producing roughly 1 new amendment through our amendment tool for every 10 cents we spend. This rate of reach is ridiculously effective and efficient—it’s a rate almost unheard of in the digital marketing space. But we need help getting the message out, and this costs money. Every dollar we raise over the next 24 hours—up to $25,000—will go toward digital ads to turn out more people and to our social media staff to focus on stopping TrumpCare.

We want EVERYBODY rising up to kill this TrumpCare bill. To do that, we need to invest more in our anti-TrumpCare outreach work NOW. If you want more people in this fight, please donate. $15, $28, $50—any amount will help us reach new folks. We’ll be expanding our reach DIRECTLY in response to your donations.

We are under no illusions that victory is assured here, but victory is possible. Every member of Congress voting on this bill will eventually have to get your vote to be reelected. That’s the source of your constituent power. That’s what makes them responsive to pressure. Remember in March when Paul Ryan embarrassingly called off his first TrumpCare vote? That happened because of public pressure. That happened because of you.

We’re not going down without a fight. Let’s stand stand indivisible again. Let’s win this.

In solidarity,

Ezra Levin
Co-Executive Director, Indivisible

 


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Health insurance options revisited

When I’m on half pay, I have to pay for part-time benefits instead of full-time benefits which means the university contributes a lot less and we need to revisit our insurance choices.  Previously we’d opted for the family plan from the university which was a bit less expensive than the other options from DH’s company (partly because DH’s company’s plan covers a lot more stuff even if it’s not any more generous with copays or coinsurance).

This year, just to make it difficult, DH’s company has added a second health insurance option.  We can do either their PPO or their HSA.  If this were a “we have lots of extra money” year, the HSA would be tempting on the basis of the way they act as additional tax-advantaged long-term savings.

Based on my calculations the cheapest monthly payments are:
1.  DH’s family HSA:  $494.06
2.  DH cover himself and the children with the HSA I take my insurance:  $584.41
3.  DH’s family PPO:  $611.88
4.  DH covers himself and the children with the PPO I take my insurance:  $660.87
5.  DH covers yourself with the HSA, I cover the children:  $701.09
6.  DH cover yourself with the PPO, I cover the children:  $742.43
7.  I cover the family:  $791.74

Of course, these plans all have different copays and different deductibles and different coinsurances. With only a fraction of the full-time subsidy, my plan is just flat out dominated by DH’s PPO, so we can throw that out. The HSA costs more every time it is used and has a higher out of pocket limit than DH’s PPO.  All three plans have exactly the same provider networks.

So, the difference in monthly payments between DH’s two family plan options is $1413.84 annually. If DC2 stuck a pony bead up hir nose, it would be $3000 + possibly another $170 for the emergency room trip under the HSA and $500 + possibly another $170 for the same trip under the PPO-500.

Do we want a sure savings of $1400 vs. a potential additional cost of $2500 for one emergency trip? That’s a potential out of pocket loss of $1100, not counting the unknown costs of doctors visits under the HSA.

The final piece of information is how office visits are treated.  From the literature they gave us, it is clear that preventative visits are free and office visits for sickness are $25 under the PPO.  With the HSA it wasn’t clear if we had to pay for the entire visit up to the deductible or if they were free without copay.  That could make a very big difference when you have two kids going into a new disease environment for a year.  After googling and looking on the plan’s webpage only produced information from 2009, we called up.  And were told to call again the next day during business hours.  After a lengthy discussion the next morning we determined that we would have to pay the entire negotiated rate for an office visit under the HSA and just the $25 copay under the PPO.  The numbers the lady on the phone threw around for predetermined office visit rates were something in the 100 range, though she wasn’t quoting anything.  (Online rates range from $65 to $380, but I’m guessing the negotiated rates are in the $100-$200 range.  Who knows!)  Because we have children, it’s likely that we will have to visit the doctor’s office for more than just the one annual allowed well-child check-up.

Assuming no emergency room trips and that an office visit is $150, then we would need to visit the doctors office 10 times while sick over the course of the year before we lost monetarily.  Assuming a $200 trip, that would be 7 visits.  Those assumptions put the HSA in as being more beneficial.  But, thinking about it another way, we will need to have at least two visits under the HSA because you always need doctors visits for school and preschool and DC2 won’t quite be three yet meaning ze won’t have tripped onto the allowed annual well-child check-up and DC1 has already has hirs for the year.  So that would really only be a savings of $1100 under the HSA or perhaps $1000, given higher office visit costs.

Really it comes down to risk.  Will DC2 need to use the emergency room?  Will we be way more sick?

We can afford the $3000 HSA max should the worst case scenario happen.  But a sure loss of ~$1000 also isn’t that big of a deal to us if it pays for peace of mind.  Having an HSA account would be nice, but it would also be a hassle given that we’ll only contribute to it for the one year (since my insurance will be more attractive once I’m full-time again).

After a long discussion with DH, we decided we’re risk averse and, more importantly, hassle averse.  We think chances are very high that we’ll be out $1000 for the year but we’d rather not have to think about how much the doctor costs in advance of a visit or what bank to use for an HSA that we will at most put $3000 in.  So, we’re going for the PPO, even though financially the HSA would make more sense.

How do you decide between insurance options?  Do you get any options?  (And are you like me and would prefer not to have options?  That ‘more options is always better’ part of microeconomics is such bunk.)