Clients ask me frequently whether they should start or continue with private medical insurance. There are two elements to the question. The first is can you afford to be without private medical insurance? The second is does it represent value for money or would you be better off “self-insuring”, which means building a kitty to pay for your own treatments?
To answer this we need to distinguish between need and choice. I need insurance to cover me for any eventuality that I could not afford to pay for, or one that would put my future financial security at risk. I also choose to insure for some things to provide me with peace of mind and to save me the need to budget for them.
For example, I need at least third party car insurance because if I caused an accident that resulted in a serious injury the claim could run to millions, which I could not afford. In contrast, I do not need comprehensive cover because if my car was written off I could afford to replace it, however I still choose to have it for peace of mind.
Insurance versus self-funding
Often the NHS is the best option for treating more serious and prolonged medical conditions. We look to private care to provide the more minor, but still important, things like new knees and hips. This is due to the speed, quality and convenience of the treatment.
A new knee or hip costs around £10,000. While that is a major expense, it is affordable for many of our clients. My experience is also that in the periods before and after treatment other costs, such as holidays, will reduce. This can partly, or even sometimes fully, offset the medical expense. So most of our clients do not need private medical insurance. But does the cost justify the peace of mind that it brings?
This is difficult to quantify, as there are so many variables. A good way to start is to look at an example and the typical premium that would apply. For a married couple aged 55, the cost is likely to be around £1,750 a year. This increases each year by around 6% as the cost goes up as you get older. You then need to add on inflation, which is higher than CPI for medical costs – let us assume 3%. This gives a conservative total increase of 9% a year.
Over a 20-year period, which takes our clients to 75, that is almost £100,000 in premiums alone. Would they really expect to spend that much on private medical fees during that period? Let us look at investing that money instead in a “self-insurance” kitty and withdrawing it as needed for operations.
I will assume an annual 7% return on their investments, that the cost of treatment increases by 3% for inflation, and that our couple need two major treatments each - one every 10 years at a cost today of £10,000. That would provide each of them with a new hip and a new knee. There may be more minor claims, but this is a good starting point.
The table below shows how their investment kitty would look. So, does that mean that private medical insurance is a rip off? Not at all. I suspect the reason for the high premiums is that some policyholders “rip off” the insurers by taking out cover knowing they will need treatment, then cancelling it shortly after. You have to bear in mind that the value of the investment can go down as well as up, but the conclusion to me is clear. Self-insuring is the way to go. However, you may be concerned that you will need a larger than average amount of treatment, or simply that the peace of mind from the cover outweighs the financial benefits of funding your own treatment.
* Based on annual investment less medical costs, plus 7% pa growth.
- PMI costs increase by 9% per annum.
- Premiums invested increase by 7% per annum.
- Current cost of operations are £10,000 per annum which increase by 3% each year.
- Operations done in years 8, 10, 15 and 20.