How Health Insurance Works

Last Updated: November 17, 2018
How Health Insurance Works

To understand health insurance, first we need to go over some terms:

Deductible

This is how much you have to pay toward medical costs every year before your insurance starts helping out. It's preferable to have a low deductible, as that means your insurance will start covering things quickly, but that usually comes at the cost of a high premium.

Premium

The amount you pay regularly (usually every month) to keep your coverage. Getting a low premium is obviously nice, but it usually comes at the cost of higher Deductibles and more restrictions on your plan. That said, thanks to the Affordable Care Act there are fewer restrictions that insurance companies are able to put on your coverage.

Coinsurance

After your deductible is payed, many plans still require you to pay a percentage of bills. So if your plan covers 70 percent, and you get a bill for a thousand dollars after your deductible, you still have to pay three hundred.

Copayment

The "copay" of an insurance plan is the flat fee you pay for every doctor visit or prescription fill. It's usually a small amount, and does not count toward your deductible. What it's meant to function as is mainly a deterrent to wastefulness: your insurer doesn't want to pay for things you don't actually need doing, so they put a copay there to ensure you have some skin in the game and take the services seriously. Lowering copays usually comes at the cost of higher premiums.

Finding Insurance

If your place of employment doesn't offer health insurance, navigating the dozens of companies and hundreds of options can be bewildering. Luckily, healthcare.gov is a new way to browse your options and compare every aspect of the insurance plans available to you.

There are four tiers of plans: Bronze, Silver, Gold, and Platinum. What's important to note is that all plans give the same amount and quality of care, referred to as Essential Health Benefits. The differences deal with how you and the insurance share costs, and higher tiers can offer additional benefits.

The main takeaway is that the higher the plan, the more you pay in premiums every month, but the less you will pay when you see the doctor, need a prescription filled, or in case of any emergencies.

Affording Insurance

The factors that affect insurance cost include how old you are, whether you smoke, location, and if it's an individual or family plan. Different insurance companies will also offer different premiums, deductibles and copayments, even within the same tier.

If you are worried about affording health insurance, there is help.

If your income is close to the federal poverty level ($11,490 to $28,725) the Cost-Sharing Reduction subsidy may help lower your costs. To receive Cost-Sharing Reductions, your plan must be a Silver one.

Many others qualify for Advanced Premium Tax Credits, which lowers your monthly premium. You may be eligible for this subsidy if your income is between $11,490 to $45,960.

Final Thoughts

Health Insurance is one of the less pleasant things to deal with in life, but it's a necessary one. If you are by and large a healthy individual, you should consider a Bronze or Silver plan so that you have some protection against emergencies that would otherwise cost you a fortune. If you require continuous medical attention and prescriptions, Gold or Platinum can end up saving you money in the long run. The decision is ultimately one you will have to make based on your finances, health, and risk tolerance.

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