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Small Business Employee Benefits and HR Blog

Clearing up some confusion about individual insurance

If there's one thing you'll get plenty of on this blog, it's talk about individual insurance.  We're big fans and it's no secret.  It's hard to know where to start the discussion though, so I'll just start with something that came up recently.health insurance confusion

There are a lot of misconceptions about individual insurance.  One that I see from time to time is the idea that because individual policies aren't a part of a group, the risk isn't spread across many people and the insurance isn't reliable as a result.  This kind of misinformation spreads because it's really easy to understand for people that don't feel like putting any additional thought into it.

It makes sense for about five seconds.  If you're in a group plan, your risk is spread across the group.  If you have a personal policy, you're on your own.

Ok, the five seconds are up.  Now is when you start to think about how every other type of insurance works.  You don't buy group car insurance.  You don't buy group life or home insurance.  Insurance companies write policies for individuals and they effectively insure all the individuals in one huge pool.

If you work for a 10 person company with a group plan, your risk is spread across 10 people.  If one person is diagnosed with cancer, the rates of the other 9 will go up dramatically.  On the other hand, if you have an individual policy, your risk is shared with anyone else in your area with a similar policy.

For the most part, people with personal policies are part of much larger groups than people with group policies.  Additionally, there are legal limits to how much insurance companies can increase  rates over time.  Group plans don't have any such protection. 

There's a reason that the President isn't talking about reforming the auto insurance industry.  That's because individuals buying their own insurance works.  Sure, there are fringe cases with healthcare that you don't see with car insurance, but for the most part the system works and there's no reason for people to be so confused by it.

I realize that this only addresses one of many criticisms targeted at individual insurance.  We're going to go over them all one-by-one.  But for now, if you hear someone saying that individual insurance isn't safe because there's no risk pool, maybe you can clear up some of the confusion.

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