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When Should You Buy Insurance?

My grandfather used to say, “Only buy insurance for things you can’t afford to replace.” By this reasoning, buying health insurance is a good idea. Replacing and fixing even small parts of human bodies is very expensive. But while the concept of health insurance makes sense, I’ve always thought the execution...

My grandfather used to say, “Only buy insurance for things you can’t afford to replace.” By this reasoning, buying health insurance is a good idea. Replacing and fixing even small parts of human bodies is very expensive.

But while the concept of health insurance makes sense, I’ve always thought the execution was very odd.

In general, you buy insurance hoping never to use it. I recently bought a new renter’s insurance policy, and it’s nice to know that if I get robbed or if my apartment catches on fire, the insurance company will give me money to replace what’s lost. But I still hope nothing happens to my apartment.

And I have auto insurance, of course, as required by law. I love my car and hope nothing bad ever happens to it, but it’s parked on the street in New York frequently, so it’s nice to know that my insurance will pay for the repairs if someone smashes into it.

Likewise, it’s nice to know that if I break my leg, or fall seriously ill, my health insurance will pay for my care. I like having that kind of health insurance.

But health insurance isn’t just for that kind of stuff, the bad things that I hope never happen.

No, I also use my health insurance when I go to the doctor for a routine physical, and to pay for ordinary, predictable health expenses like recurring prescription medications. I just used my health insurance this weekend to pay for (part of) a routine eye exam and a new pair of glasses. In these situations, I’m not using the policy to “insure” myself against anything bad happening, I’m just using it as a different way to pay a predictable expense. Unfortunately, I think it’s a much worse way.

This is on my mind today not because Obamacare is in the news again, but because I just went to the doctor for my annual physical.

Actually, I went to the doctor three weeks ago. But I just found out how much it cost today, when I got an email from my insurance company that began with the words: “This is NOT a bill.”

Instead, it provided me a link to a document that told me the “amount you might owe.” Soon, I will receive an actual bill, from the hospital that did the routine tests that my doctor recommended at my physical, which will tell me the amount I do owe.

I know this is going to happen because it happens every time I let my doctor do “routine” tests. I’ve told her about it, but she still has no way of telling me what anything is going to cost me. So once again, I was forced to shrug my shoulders and do whatever she recommended, then go home with no idea how much any of it was going to cost.

Then, three weeks later, I find out that while most of the tests were completely covered by my insurance, two weren’t, and I “may” owe the hospital that did the tests just under $200.

It’s not a huge amount, and it’s less than the bill I got last time. But I don’t like knowing that every time I let my doctor draw blood I’m going to be stuck with a bill somewhere between $0 and $500. When possible, I like to know how much something is going to cost ahead of time, and then decide if the expense is worth it. In almost every other situation in life, that’s how buying things works.

But when it comes to health care, we let “insurance” companies be the middle-men in every transaction—even the routine ones—and it’s in their best interests to keep actual prices opaque.

And their m.o. has influenced the whole health care industry, and now most hospitals and doctors can’t even give you a straight answer about how much routine things cost. (Time Magazine published an excellent special report on the incongruities of hospital pricing, called “Bitter Pill: Why Medical Bills Are Killing Us,” this past March.)

Good health may be priceless, but that doesn’t mean that health care should have no price tags.

I think I should be told how much my health care is going to cost me before I get it, not three weeks later. And I think that insurance companies are the primary—if not the only—reason that this is impossible. I think having insurance to pay for unexpected expenses is great. But I think adding the middleman of an insurance company to ordinary and expected purchases is the worst possible thing for the consumer.

There are a lot of problems with our health care system, but as a healthy person who is also a student of the free market, this is the one that’s most personal to me.

What do you think? Have you had similar experiences? Do you have any ideas for improving the situation? Let me know by replying to this email.


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I could recommend a health insurance stock here, but that feels a bit hypocritical just this moment. Instead, here’s a fund that offers exposure to all segments of the health care market. Whatever happens with the insurance situation here in the U.S., spending on health care worldwide is going to continue to grow, as developed country populations age and emerging populations achieve better health. Here’s a fund that will benefit from both trends, recommended in the August Investment Digest by Richard Young of Young’s Intelligence Report:

“The mix of aging populations and increasing incomes across the world will drive sales of devices, drugs, and other medical products going forward. The American medical multinationals owned by the Vanguard Health Care ETF (VHT) are poised to deliver the types of products being demanded both here at home and abroad.

“In VHT’s top 10 holdings are powerhouse companies like Johnson & Johnson, Pfizer, Merck, and Bristol- Myers Squibb. The low 0.14% expense ratio and 1.6% yield ETF tracks the MSCI US Investable Market Health Care 25/50 Index.”—Richard C. Young, Young’s Intelligence Report, September 2013

Remember to reply to this email with your personal take on the role of price opacity and insurance companies in our health care system.

Wishing you success in your investing and beyond,

Chloe Lutts Jensen

Editor of Investment of the Week

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.