Dear Dollar Stretcher,

My spouse has health insurance through the union for our entire family. I am also employed and have been purchasing family health insurance coverage for $178 per month. The deductible for each plan is the same ($200 per person and $600 per family per year). Would I be wise to stop paying for the additional family coverage and use that $178 per month towards paying off debt? I find health insurance to be very confusing especially when you have two companies to deal with, one primary and one secondary. Even with all of this insurance it always seems as though I am still paying out of pocket for almost all doctor visits. My family is relatively healthy and does not require many office visits, although I am always afraid if someone does become seriously ill or injured I do not want to put my family in the poor house to cover these expenses. Can you shed any light on this confusing situation for me?

Thanks,
Tammy S.

Tammy asks a good question. And while it might seem easy to answer, it's a great opportunity to study how insurance works and what it's supposed to accomplish. So let's take a look at how to save money on insurance.

We can learn by evaluating Tammy's situation through professional eyes. To do that we'll need to look at something called "risk management". What's that, you ask? Risk management is evaluating the bad things that can happen to people and companies and deciding what's the best way to control and manage each risk.

There are three parts to risk management. The first is to estimate (or if possible calculate) how likely the event is going to occur. In Tammy's case she can expect to make a couple of visits to the doctor's office each year. The real question is whether they'll face a major illness or accident. And the answer is that it's not likely, but it could happen.

The second part of risk management is to look for ways to reduce the risk. Perhaps a healthier diet would reduce the odds of major medical problems. But, it's almost impossible to reduce this risk to zero.

Which brings us to the third part of risk management. And that's the question of how would you pay for an accident or illness if it did happen. Tammy's case provides some excellent examples of the choices available. The first possible solution would be to pay for it herself. If little Johnny gets sick you take him to the doctor and write a check. This strategy works well on smaller bills.

The second option would be to have purchased insurance to cover the cost. But insurance isn't always the best answer. As Tammy pointed out insurance wasn't covering the smaller bills because they were under the deductible.

On the other hand Tammy would want to have the insurance if Johnny fell off his bike and broke an arm. Insurance is a fine choice for covering the bills that are triggered by unexpected events and are just too big for the savings account to handle.

In fact, that's the major reason that insurance was created. To allow a group of people to share the risk that an event would happen and each contribute to a fund to pay the cost if it does happen. That's just what Tammy and her co-workers are doing when they buy insurance. They each pay a premium so that the one person who needs heart bypass surgery will have coverage.

As we all know, there's also an insurance company involved in the policy. And it's important for us to remember that they'll want to collect enough premiums from everyone to cover the medical bills plus their overhead plus some extra for profit.

Why do you care? Because if you take all the people who are in the plan they will collect less in benefits than they pay in premiums. If you totaled all the premiums and all the bills, on average every policy holder loses just a little. If you're insuring major medical expenses that small loss is worthwhile for the comfort of knowing you have coverage if someone gets real sick.

But if you're buying insurance to cover eye glasses or other small predictable expenses the insurance company's overhead and profit will actually make them cost more. As a general rule you should only insure bills that you couldn't afford to pay yourself.

There's a third possible financial solution. And that's to not make a plan to cover any loss. If a major illness happens you'd deplete family assets until government and charitable assistance kicks in.

Now let's apply that knowledge to Tammy's question. She and her husband have both been getting extra coverage for the rest of the family. In effect everyone is covered twice. Is that necessarily bad? Yes, unless there's a specific reason to want the extra coverage it is a waste of money. Tammy recognizes that. Let's see if we can explain why it's true.

Consider what happens. Each policy has a deductible. That's an expense level that you have to meet before the insurance company pays anything. In this case both policies start at $200 per person. Most of Tammy's bills are under the deductible level so she doesn't collect from either company.

Tammy will also find that one insurance carrier is the primary insurer and the other is the secondary. The primary will begin paying after the deductible is met. The secondary insurer will not pay unless the bills are larger than the maximum allowed by the primary or the procedure is not covered by the primary carrier. That doesn't happen often.

One valid reason for wanting two policies is to increase the maximum coverage. The second company will step in after the benefits are exhausted on the first company. If you face a long battle with cancer that could be helpful.

The other possible reason for double coverage is where one policy covers certain losses that the other one leaves uncovered. If your family history is prone to a certain type of illness check each policy for coverage on it.

What should Tammy do? Compare the two plans and see which one does a better job of covering her family for the money spent. It's possible that one is partially paid for by the employer. Unless she has some specific reason to be concerned about the maximum benefit it's probably wise to cancel the family coverage on one plan. The money that she saves can be used to pay for those bills that are under the deductible level. And then she can hope that her family stays healthy and she has no need for any insurance!