Understanding Health Insurance:
Health insurance can be very pricey if you don’t understand the terms of your insurance. You may buy the wrong kind of insurance, costing you thousands of dollars over your lifetime. This article aims to break down the terms used in health insurance and help you choose the correct insurance for you and your family.
The Importance of Premiums in Health Insurance
These are the topics I will cover today:
What is a premium, how does insurance break down your medical bill? Under that, I will discuss deductibles, co-insurance, maximum out-of-pocket expenses, and co-pays. Finally, I will show you how to compare two policies and the type of insurance I decide.
Decoding Health Insurance: Deductibles, Co-insurance, and Maximum Out-of-Pocket Expenses.
When you purchase medical insurance, you agree to pay the insurance company a fixed amount at regular intervals. This amount is called the premium. You will pay a monthly premium if you buy insurance on your own. If you purchase insurance through your employer, your monthly premium is deducted from your paycheck each pay period. Sometimes, employers may pay all or a portion of your monthly premium.
Choosing the Right Health Insurance: Comparing Policies
Most health insurance policies cover an annual physical at 100% of the cost, which means I’m not responsible for any payment for my yearly physical. The insurance company covers the entire payment. But let’s say I need to get a medical procedure done, and the hospital sends me a bill after the procedure. The first part that I’m responsible for is the deductible.
The Role of Premiums in Health Insurance
The insurance contract clarifies this deductible at the individual level for an individual plan and at the family level if I enroll in a family plan. I’m committed to covering 100% of the medical expenses until I reach my deductible… The next thing that I have to worry about is the co-insurance. The insurance company defines co-insurance as a percentage split. It could be 80/20, 70/30, 90/10, or 50/50. An 80/20 co-insurance means that the insurance company is responsible for 80% of the bill after I meet the deductible, and I’m responsible for the remaining 20%.
Health Insurance Coverage: The Role of Deductibles and Co-insurance
The final thing I must worry about is the maximum out-of-pocket limit or MOOP. MOOP is the maximum amount I must pay over the year towards medical expenses. If my medical expenses exceed the MOOP limit, the insurance company is responsible for the entire amount over the limit.
Maximizing Your Health Insurance: Understanding Out-of-Pocket Limits
Let’s see an example of how this works. Let’s say I got a medical bill for $10,000. My deductible is $3,000. My co-insurance split is 80/20, and my maximum out-of-pocket limit is $4,000. Let’s look at the math here. My bill was for $10,000, so I will pay the deductible of $3,000 first. That leaves me with a balance of $7,000. My co-insurance is 20%. 20% of $7,000 is $1,400. The total deductible and co-insurance is $4,400, but my maximum out-of-pocket limit is $4,000, so I’m only responsible for paying $4,000. The insurance company is responsible for paying the remaining $6,000.
Choosing a Health Insurance Plan: Low Deductible vs. High Deductible
Now, if my MOOP or maximum out-of-pocket limit were $5,000 instead of $4,000, I would be responsible for the entire $4,400, and the insurance company would pay $5,600. Apart from these costs, I may also be responsible for co-payments. These are payments that I would make directly to my medical provider and may or may not be part of the deductible.
Understanding Health Insurance: An Overview
Some insurance companies may only require co-payments once you meet the deductible. If you have a family plan, each member must meet their deductibles before insurance kicks in, but there is also a family maximum out-of-pocket limit. Your medical plan resets every year. Also, in-network costs and MOOP limits may be different from out-of-network costs.
Comparing Health Insurance Plans
So, let’s compare hypothetical health insurance plans. I only compare these plans based on financial aspects, not other factors. For example, some plans may preclude pre-existing conditions or specific treatments, or some may not support your preferred care provider or postcode. The first plan is a no-deductible plan. Let’s say I receive a $10,000 bill before insurance kicks in. My deductible is $0, but there is co-insurance with an 80/20 split, making my co-insurance amount $2,000. The total deductible plus co-insurance will be $2,000, below my maximum out-of-pocket limit of $5,000. So, I will pay $2,000, and my insurance company will pay $8,000.
High-Deductible vs. Low-Deductible Health Plans
Let’s contrast this low-deductible plan against a high-deductible health plan. I use a high-deductible health plan, but this one is a hypothetical example. Again, I’m assuming the same medical bill of $10,000, but this time my deductible is $5,000, which leaves a balance of $5,000. Out of which, I’m responsible for 30% because of the 70/30 co-insurance split. For example, a co-insurance of $1,500. The total co-insurance and deductible is $6,500 for this plan. My out-of-pocket limit is $7,500, so I am responsible for $6,500 because it is under the maximum out-of-pocket limit, which means the insurance company will pay the remaining balance of $3,500.
Choosing the Right Health Insurance Plan: Factors to Consider
If I enroll in a low-deductible plan, I pay $2,000, and for the high-deductible plan, I pay $6,500. Why then would I enroll in a high-deductible health plan? So, two reasons.
First reason
Enrolling in a high-deductible health plan
I pay lower monthly premiums, reducing my overall expenses. So, if I’m healthy and in general don’t suffer from chronic illnesses, I won’t need to see the doctor very often and won’t need to deal with deductibles and co-insurances. You have a strong monetary incentive to stay healthy through diet and regular exercise to keep your monthly premiums low. But if I were older with pre-existing conditions and needed constant medical care, I would probably enroll in a lower-deductible plan. The good thing is that I can switch between different plans during open enrollment. You may also be able to change plans if you have qualifying life events such as the birth of a child, marriage, or divorce.
Maximizing Your Health Insurance: Understanding Tax Savings and Tax-Free Growth
The second reason
is tax savings and tax-free growth.
You can contribute to an HSA in one of two ways. Enrolling in a high-deductible health plan through your employer can contribute to the HSA tied to that insurance company. For example, if your HDHP is through United Healthcare, you can open an HSA account with Optum Bank. If you are with Care First, you can open an account with further. If you contribute to the HSA through your employer, the employer can send pre-tax income dollars into this account on your behalf.
If you choose to contribute independently, you will contribute with after-tax dollars, which you will then claim a tax deduction when you file a tax return. The only difference is that if you give money to your employer, you can save on taxes from the government, the state, and FICA insurance. On the other hand, if you contribute yourself, you will save only on federal and state taxes and not on FICA tax. In either case, the IRS limits how much you can contribute yearly. And finally, you have to log into your HSA account and select your investments. So, don’t forget that part. You can contribute as long as you’re enrolled in a high-deductible health plan.