Health Insurance vs. Emergency Funds

Just to put it out there at the outset, we believe everyone should have health insurance. We're insurers, which means we're not huge risk takers, at least in this area. We've seen the trends in health spending over the years. We want people to be protected. That said, you should have the knowledge to make your own decision. So we'll break it down for you. Can you "self-insure" with your own medical emergency fund or should you sign up for health insurance?

What is an emergency fund?

An emergency fund is money set aside for, you guessed it, emergencies or situations when you need quick access to money to deal with something unexpected, such as job loss. A medical emergency fund is savings specifically reserved for medical emergencies, such as illness or a serious accident. These savings can be integrated into your regular emergency fund or separate. 

What specifically are you saving for?

With any good savings goal there are a couple of important questions to answer. What are you saving for? And how much do you need? We'll get to the second question in a minute but first, let's consider what you actually need to save for. Routine health expenses such as annual dental exams, contact lenses, or occasional professional therapy are not emergencies and can be built into your regular budget. Unexpected costs due to illness or injury are what you should prepare for. They may include ongoing expensive prescription medication costs, medical equipment, extensive physiotherapy or nursing care. These costs could also include related expenses such as time off work to recover, non-medical assistance in your business or household, or home modifications. 

How much do you need in your health emergency fund?

In a typical emergency fund, financial experts advise saving between 3-6 months living expenses. If you choose to go without any insurance, you should consider having additional money saved so that in the event of an emergency, you don't have to dip into money earmarked for routine living expenses. This is particularly important as medical emergencies often impact your ability to work. But how much is the right amount to save? There is no one answer; everyone's access to outside support and risk of developing chronic illness or sustaining a serious injury are different. In part due to the optimism bias, we tend to underestimate this risk for ourselves. Looking at some actual numbers can help. The average cost of specialty drugs in Canada is almost $20 000 / year. These drugs treat chronic inflammatory conditions such as rheumatoid arthritis, Crohn’s disease, and severe psoriasis, as well as cancers and other conditions. 1 in 5 Canadians experience a mental health problem or illness in any given year. With a gap in mental health services in public healthcare, Canadians spend an estimate of $950 million per year on psychologists.

What is health insurance?

Health insurance provides protection against the possibility of financial loss by paying for some or all of your medical bills. Provincial plans alone do not cover all routine healthcare or unexpected costs. Private health insurance for which you pay a fee, usually monthly, provides coverage for many health expenses not covered by provincial insurance. 

While coverage for routine medical expenses is good, the true benefit of insurance is protection against the risk of facing large, unexpected, ongoing expenses that could entirely drain a typical emergency fund. Disability insurance is also important to consider. It replaces some of your income should you become unable to work due to illness or injury. 

Why you should have both an emergency fund and health insurance

If the past two years have taught us anything it's that life is unpredictable. A serious health issue can wipe out a typical emergency fund quite quickly. While you can build up a larger safety net, through your own savings, your money can work better for you. Insurance, including health and disability provides a regular, budget-able, tax-deductible expense. After building up a modest emergency fund, you can focus on growing your money through investing, or using it for personal or professional projects, guilt and worry free. While it's true there's always a risk you won't "need" all your insurance, that means you'll have been lucky enough to lead a healthy life. Both insurance and an emergency fund provide peace of mind. Both help you build a healthy, resilient financial future.