Say a guy who was making 40 grand a year hits the lottery. 50 million or some such amount.
He decides to never ever work again . What do people who are Independently rich do for health care? Do they still buy health insurance, or do they just pay all the bills out of pocket? What’s the math on this? Buying medical insurance on ones own is expensive, but I would think in the long run if a major operation came up it would be cheaper.
I think generally rich people just get really GOOD insurance. Cancer, say, is shockingly expensive.
How old is your hypothetical guy? Living off a $50 million lump sum (which is more like $25 million after taxes) leads to a much higher expected annual income if you’re over 60 than it does if you’re under 30. The older guy can probably skip health insurance without worrying about keeping up his new idly rich lifestyle, but the younger guy definitely can’t.
Health insurance is like most other kinds of insurance, and gambling in Vegas.
You pay something in, and sometimes get something back. The total of what gets paid in is bigger than the total of what gets paid back out, since the house takes a cut (i.e., a health insurance company has to pay for operations and take a profit, in addition to paying claims).
In statistics, the expected value is what the average return is for all people. In these cases it is negative.
The reason you get insurance is to protect against a catastrophic scenario that could wipe you out. If you have so much money that can’t really happen, then you will, on average, be better off by not buying insurance because you won’t be supporting the insurance company.
I don’t understand ultrafilter’s math. If I have $25M to invest, and get a modest 5% return in income, I’m making over a million a year. Does someone in that bracket need health insurance?
The question that I can’t answer is how much can a catastrophic illness cost? I am sure it could get into the $100,000’s but I don’t know if it gets into the millions.
Yes, they buy health insurance. They go to their insurance broker who sets them up with a plan. Depending, it may cost between $2,000 and $3,000 per month. They will probably opt for a high deductible.
Why buy?
The reason is to protect against catastrophic events. What if you get in a car accident, are incapacitated and need multiple surgeries and physical therapy over a long period? What if you develop a rare form of cancer or need organ transplants?
Also, and very important, is that the insurance company negotiates the actual payments to the care providers. If you don’t have insurance you pay retail. If you have insurance, the insurer pays wholesale and in the health care business wholesale can be less than 10% of retail. Sounds illegal but the insurance companies have found ways around the loopholes in the law.
As screwed up as the healthcare business is in the U.S. today, health insurance is a good bet, even for the really rich.
And that’s the jist of my question. At what point does the cost of self-insurance out weigh the risk one takes to pay the bills himself. An acquaintance of mine had enough money in his retirement account to retire at 55 and live the same middle class life he has been EXCEPT for paying health insurance premiums. He said it was close to 18k a year for he and his wife. OUCH! Even if it never goes up that’s almost 200 grand before he can get Medicare. Is it worth the risk to not have coverage for 10 years and pay the bills themselves? What if he invests that $18,000 every year in a conservative, safe bond rather than pay the premiums.
But it can. And that’s the tangent that skews the matrix of my question. Between Medicare and her supplemental plan my mothers cancer treatment has already run bills in excess of 400K. And she still has a ways to go (surgeries, treatments, care, etc…). One womans treatment that we know of ran in excess of a million dollars.
One possible test case: Did Christoper Reeve have health insurance? I don’t know if he was worth $50 million but I bet he’d fall into the category of independently wealthy. I suspect his situation could indeed have wiped out several millions of dollars.
I’m not so sure. I’m self-employed, so I have to provide my own insurance. I’m 33, non-smoker, and play $190/month for coverage that has a $2,500 deductible and 0% coinsurance. Office visits are $30. Looking at ehealthinsurance.com, I could find plans as cheap as $160 with that data.
All it takes is one ill health incidence and that number can skyrocket. My sister couldn’t afford insurance when she went into business on her own. The rates they quoted, IIRC, were in the $2-3,000 per month range for her and her husband. Husband (they’d planned on him being part of the business) went out and got a job just so they could get insurance.
Yipes.
He was a member of the Screen Actors Guild, though, so he could buy health insurance through there, I’m sure.
There’s a very important difference between insurance and gambling. If you’re at a casino’s roulette table, then you can either win or lose some money from the bets you make, but you have the option of not betting. There’s no similar escape clause in insurance: you can buy insurance or take your chances, but if you’re going to get sick, you’re going to get sick.
5% is an optimistic estimate of the risk-free rate. 2-3% would be better; let’s split the difference and say it’s 2.5%. That gives you an income of $500,000 a year which will never be adjusted for inflation. So right away you’re losing compared to the guy who works for the same income and gets cost of living increases, and he definitely needs health insurance.
But suppose you’re willing to eat away at the principal as long as you can avoid outliving your wealth. This is where the age difference comes in. This life calculator says that a 30 year-old guy who fits the default values for the form has a 50% probability of dying between 67.5 and 85 years of age, whereas a current 65 year-old has a 50% chance of dying between 73.5 and 87 years of age.
So the younger has even odds of needing between at most 55 years of income, whereas the older guy has the same odds of needing at most 22 years of income. The younger guy will run out of money in 55 years taking a little less than $850,000 per year, whereas the older guy will run out of money in 22 years taking a little less than $1.5 million. Granted, those payments are not as conservative as they should be because both guys have a decent chance of living longer than they expect and they probably want to leave something in their estate, but it illustrates nicely why the individual’s age matters.
(Obviously the guy who’s willing to burn through principal doesn’t need health insurance here, but there may be good reasons to not want to do that.)
You are being unduly pessimistic. Standard advice for living off a lump sum with a minimal risk of running out of money is to take 4% and to increase it by inflation each year. That gives you $800k a year and it is adjusted for inflation.
Or else the insurance company just flat-out won’t cover you, no matter how much money you throw at them. Which throws another monkey wrench into the question. My own amusing story, from many many years ago, when I applied for an individual health policy with Blue Cross. They call me on the phone and ask a bunch of questions about the fact that I was treated for depression for a 6 month period three years earlier.
So I said yes, I’d been in treatment. I haven’t been in treatment for three years.
“So, you’re cured now, right?”
I was so gobsmacked that my brain stuttered. “Um, what?”
“You’re cured now?”
In retrospect, I totally should have gone along with her, but I couldn’t believe she was even asking.
“You know what depression is, don’t you? I told you I haven’t needed treatment for three years. I feel fine now. Beyond that, I can’t predict the future.”
I got a letter denying my coverage about a week later. 
But it’s okay… I got a policy with another company some years later. Much cheaper premium, although my deductible is astronomical. Just in time for me to get really sick, too. My insurance company *loved *me. 
I’ve heard that SAG insurance is quite good and one reason some people join. You get the same insurance for the same payments whether you’re Clint Eastwood or Bloody Bus Passenger 3 with two featured extra roles and one speaking, too.
It absolutely does.
To use my father as an example, he had an incurable immune disease which left him in immense pain and unable to work, and would probably eventually blind and cripple him. I never saw the actual EOBs, but I am told that his disease (specialists, tests, daily doses of two different types of Oxycontin, a dozen other daily medications, physical therapy, etc.) passed the million dollar mark several years before he died.
By the way, one thing to check in the fine print of your policy is whether or not there’s a lifetime maximum coverage, which when it exists is typically $1 million.
Again, you run into the problem that living off a lump sum when you’re 65 is much easier than living off that same lump sum when you’re 30, especially if you want to leave behind an estate. Obviously, for a large enough lump sum, it doesn’t make much difference, but there are a limited number of people who can win that much in the lottery.
Let’s say you’ve got cancer & have been referred to a major treatment center. In the USA, that means that you see the finance people early on.
Some state-subsidized institutions offer free treatment for residents who can prove they are indigent. Citizens of some countries (Saudi Arabia, for example) will be covered by their own government.
For the rest–you can say “I’m really, really rich! Bill me! Oh, & I’ll pay the deposit, first.” But it’s preferable that you just supply Proof of Insurance. (And it’s even better if your insurance company won’t haggle about what type of treatment it will cover.)
Yes, treatment can be extremely expensive.
Lemme introduce you to my brother. He and his wife did in vitro fertilization. Three embryos were implanted, and all three took. During the sixth month of her pregnancy, she traveled to El Paso to visit her sister, where she went into premature labor, giving birth to three tiny triplets in an out-of-network hospital. All three babies were in the NICU, in incubation and attached to various monitors, for three solid months, in such delicate health that they couldn’t be moved to a hospital near my brother’s home in Colorado. All that time was, of course, billed at out-of-network rates to my brother’s insurance company.
So, that’s three premature infants, three months of intensive care, and an out-of-network hospital. I understand that the final cost to the insurance company was somewhere in the neighborhood of $2.1 million. My brother tells me that the insurance company uses his case as an example of “don’t ever let this happen again!” with their new employees. The triplets, by the way, turned 8 this year, and are doing just great.
Does our hypothetical multi-millionaire have a family?
Not to mention the cost of in vitro itself, which can cost tens of thousands of dollars per try, with only a 40% success rate. Many people get second mortgages to cover the cost, as it’s often not covered by insurance at all.
Not that that piece matters to our hypothetical millionaire, but I thought we should add it to our total cost for your nieces or nephews.