Dental insurance isn't really a type of insurance?

Question

The central tenet of insurance is to pay slightly more on average while getting protected from paying very large amounts of money should disaster strike. In essence it's paying a premium to lower risk. A large company can pool risk, so it doesn't feel the effects of a small number of i.e. houses being burned down by a wildfire in California.

From this link, it's very common for dental insurance to have quite low annual maximum benefits in the $1000 range, in addition to a lifetime maximum. But major dental procedures with surgery can cost much more. The companies are very large risk pools, so they only care about average cost like most insurance companies. This means the only reason they impose benefit limits is because not doing so would significantly add to the average cost. Thus, a substantial fraction of dollars spent are spent beyond this limit.

This leaves two questions:

1. Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?
2. Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

Answer 1

Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?

Because houses don't routinely go on fire, but teeth do routinely rot. The chances of you needing a dental treatment are exponentially higher than the chances that your house would undergo a catastrophic event. In the end, insurance companies are in it to make a profit, so if the chances of covered event to occur are very high, the cost of the covered event cannot be significantly higher than the premium because the pool of people who subsidize the insurance payout (those who don't have a covered event but do pay premium) is small.

Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

Dental insurance provides additional benefits: negotiated rates, discounts, covered preventative measures (that alone may be comparable with the premium costs, if paying the list price), etc.

Answer 2

Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?

These policies exist because there is demand for them. Most likely because these low maximums are a cheap way for employers to offer dental insurance, and perhaps because most people view the risk of a significant dental expense as fairly low.

There are also dental plans with no maximums, or plans where the maximum goes up each successive year of coverage.

Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

If the maximum they cover exceeds the premiums then it is protecting you from some risk, it's just a question of degree. That's a value question for you to decide.

Many plans include preventive care and don't count it towards the annual maximum, if you take advantage of that, that's a few hundred dollars of value included, and then the rest of your premium would cover the risk of a higher-cost procedure.

You might also benefit from contracted rates. Regardless of your plan's maximum most insurer contracts with providers dictate how much the provider can charge for various services/procedures, so it could be that even when you're paying out of pocket you save due to the contracted rate. This can go the other way too where paying cash is better than going through insurance, so it's not a clear pro/con for dental insurance.

For some people, having paid for something already makes them more likely to use it, so a plan that includes preventative care visits might encourage them to actually go more frequently than they otherwise would.

Answer 3

One of the big problems with insurance of any sort is adverse selection which is when the people who buy an insurance policy are more likely to need it than the population average. When that happens, there is a death spiral where the carrier rapidly raises premiums to offset their realized expenses which drives even more healthy people out. Here's an article that shows empirically that there is adverse selection in dental coverage. https://www.researchgate.net/publication/228450919_Adverse_Selection_and_the_Demand_for_Supplementary_Dental_Insurance

From the provider's perspective, a good way to curb that adverse selection is to put a spending cap that people with good teeth think is moot and people with bad teeth think makes the plan not worth buying.

I think the above answers your first question.

As to why people still buy the insurance, there could be a few reasons. Some people might just buy dental insurance because it's offered without looking into the details. Some people may look at the details and decide that the out of pocket maximum is, for them, very expensive. Another reason is that by buying dental insurance, you get different rates from dentists. As an anecdote. I left a job that provided dental insurance and became a self pay dental patient. I found that for just biannual dental appointments, it was cheaper to buy new dental insurance than it was to be a cash customer at my dentist.

Answer 4

You need to do the math. Because I have always had dental coverage as an option from my employer the math has been simple. Selecting dental insurance has been worth the cost.

About 10 years ago my portion for the monthly cost of the insurance for family coverage was well below the cost of the 8 cleanings, 8 exams, and 4 sets of x-rays. All of which were covered 100% as preventative care.

The reason why the monthly premium was low was because the employer covered some of the monthly cost. During the years that we know we needed orthodontics coverage the calculus was even easier.

If the coverage isn't partially paid for by your employer, you have to decide if you get enough benefit to justify the insurance.

Answer 5

Why are companies passing on so much risk to individuals, when they don't do so for other types of insurance such as houses that can cost upwards of a million?

Because they can make money this way and people/HR consultants are misled enough to buy it

Why pay for insurance in first place if it can't protect you from the risk of very expensive procedures?

I don't. I ran the exact analysis when I moved out of my employment based insurance and came to the conclusion that dental insurance makes no sense at all for us. The sum of of the premiums are very close to the annual maximum, so the potential benefit is really small.

Instead we negotiated a yearly preventive care plan with our dentist which covers all regular stuff at a 3rd of the price that insurance would cost and also includes discounts for elective procedures.

The only exception would be if you already know you will have significant dental expenses (more than twice the annual max) over multiple consecutive years. In this case, you might as well get insurance and collect the small difference between premiums and annual max. Don't get your hopes up: it'll be a few hundred dollars at most.

See also https://www.investopedia.com/articles/pf/07/dental-insurance.asp

Answer 6

All the other answers, focusing on whether premiums exceed payouts, are missing the point. "Health insurance" in the US isn't insurance either and for the same reason: company-provided health and dental insurance is paid pre-tax.

If your company pays you the cost of dental insurance in salary, that money is taxed. If you then pay that amount at the dentist the extra salary isn't enough to cover the dentist. But if your company pays for your dental insurance instead, that benefit isn't taxed. So companies provide health and dental insurance to increase employee compensation while avoiding taxes.

There's an incentive for as many expenses as possible to be covered by insurance that the employer provides because that allows as many costs as possible to avoid taxes. That's why health and dental insurance cover routine costs whereas insurance that's paid directly by employees like auto and homeowner's don't cover routine costs. It's also, indirectly, the root cause for high health care costs in the US (insurance-covered health care costs have surged while out-of-pocket health care such as over-the-counter drugs and elective cosmetic and laser eye surgery has gone down in price).

Answer 7

Because some of the most expensive work is cosmetic

And insurance usually doesn't cover cosmetics work even in health care. Dental insurance covers things like fillings, crowns, and root canals. To make you feel better they also "cover" 2 cleanings a year, even though you're paying for those in the premiums since insurance companies know you'll do it.

And companies get tax breaks for insurance premiums

As you correctly point out, dental insurance don't cover many expensive things, it's also generally possible to "self-insure" yourself for dental visits.

So why is dental insurance so popular with companies - the government gives them tax breaks to buy insurance for workers.

They can buy nice insurance plans for workers as a way to up compensation. Workers like it because they don't get taxed on money they don't spend directly. The federal government added tax loop-holes for it, so companies use them.

Thus, there are several pretty terrible plans for low income earners. They get a tax break on dental care up to $1000 (in your example). After that it's out of pocket.

Answer 8

Insurance works best when the damage is very costly, the probability to incur the damage is very low and also hard to know. Otherwse, the overall costs of payouts and adverse selection effects force insurers to demand very high premium and offer relatively low coverage.

Many insurance contracts that exist on the market just aren't very good deals. They exist because people like the peace of mind, don't understand the terms, or don't pay the premium themselves.

Even some of the most common and useful insurance contracts like car (liability) insurance or regular health insurance work because they are heavily regulated and (more-or-less) mandatory so the risk is diluted.