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Should You Avoid High-Deductible Plans?


Swapping lower insurance premiums for future risk.

Several media reports are commenting on the favorable improvement in household debt service ratios. And on the surface, I'd agree. But 10% annualized default rates across many consumer loan categories and no consumer loan demand to speak of ought to make things look better.

Unfortunately, neither the government nor anyone else I've found has been able to quantify a much more troubling -- and I would suggest offsetting -- "debt" bubble that I believe is inflating in the consumer world: the explosion in contingent consumer liabilities.

Now admittedly, contingent consumer liabilities is an odd term, so let me simplify things.

As I see the world, the most rapidly growing contingent consumer liability is in insurance deductibles. Whether for their home, their car, or their own medical care, consumers are swapping lower monthly premiums for higher deductibles. And while this is helping their short-term cash flow, I strongly doubt most consumers are in any way saving for the potential risk that they have just assumed.

And no where is this issue more clear than in the medical insurance space.

In an effort to drive a change in behavior among plan participants (as well as lower the cost of health care for corporations), most medical insurance carriers have dramatically changed the composition of their options.

For example, in my own case, I'm being forced out of a family plan costing $1,500 a month with a $600 annual deductible ($18,600 max exposure) into a plan costing $770 a month, but with a $10,000 deductible ($19,240 maximum exposure).

While I've included my maximum potential exposure in our 2010 budget, I strongly suspect that I'm in the minority. My guess is that most Americans will budget the lower premium plus some modest out-of-pocket expenses for prescriptions etc., believing that the monthly savings is real.

And I suspect that the same planning is likely to follow for those raising deductibles for their cars as well.

My point in all of this isn't to suggest a right or wrong, but rather to focus Minyans on the change. And unfortunately, American consumers' financial history suggests that we have a funny way of spending all the savings we can find and then some. And I suspect that in our current economic recession, that outcome is almost certain.

But while this is likely to represent a short-term windfall to consumers, I fear that ultimately it will bring financial pain to our economy, as an increasing number of consumers are unable to meet their growing contingent liabilities.

Time will tell. But it has all of the "feel good today, postpone the pain until tomorrow" characteristics of a bubble.

And unfortunately, this one can't be measured.

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