Monday, February 18, 2008

The Value of a Certificate if Creditable Coverage (Part 2)

If the value of a short term medical insurance lies primarily in the certificate of creditable coverage that is included as a legal requirement as part of all STM policies, then doesn't it make sense to buy the least expensive highest deductible minimal benefit STM that we can find. Probably not; but the explanation for this type of thinking lies more in the psychological realm than in mathematics.

In the example used in part one it was easy to calculate a tangible value of the STM policy into tens thousands of dollars. But this example is not common of the way insurance usually works. The primary benefit of insurance is for the intangible or unexpected costs. When we compare a tangible known cost (like the knee surgery in the example) with an intangible unpredictable medical cost, the latter fades in comparison.

Our mind naturally values the tangible cost much more than the intangible. Yet the intangible risks remain the same as before. In other words the value of insurance is based on a factor completely unrelated to the assumed knee problem. Remember that the STM policy is not paying for the knee procedure and its cost is based only on the possibility of unexpected and unpredictable expenses.

The human brain automatically enlarges the value of the tangible and diminishes the value of the intangible. Some neurologists link this behavior with a pre-historic survival wiring built into our brain. In a life or death situation, it makes no sense to weigh the cost of an intangible future event if we don't live past today to see the benefit of our "wise" decision based on logic and probability. If we relied solely on logic, the decision of the best STM should be made independently of the knee issue. Obviously the insurance has value other than the value of the Certificate. Yet scores of examples show us those individuals facing the need to obtain a Certificate of Continued Coverage shop for only the least expensive short term medical insurance. Not logical, but perfectly normal considering the neurological makeup of our human brain.

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