Back to Basics: Health Insurance

Health Insurance

Back to Basics: Health Insurance

Do you try to avoid the doctor’s office like the plague — until you end up with the plague? I get it. No one enjoys a trip to the doctor or a stay in the hospital no matter how good the Jello is. But life happens, and with it come medical services and their associated costs. 

In fact, the average cost of a hospital stay in the United States is over $15,000. Health insurance is one of the best ways to offset the high price of medical care. But not all Americans carry coverage.

Are you currently without health insurance? Do you want to be more proactive about understanding your coverage? If so, this installment of my Back to Basics series should help. I’ll discuss what health insurance does, different types of coverage, and how to find a policy that fits your budget and needs. So before you climb a fourteener or start planning that ski trip, let’s go back to basics on health insurance.

Health Insurance Basics

The first step to understanding health insurance is to speak the language. Are you familiar with the following health care terms?

Deductible — A paid deductible kicks an insurance policy into high gear. For example, a policy with a $1,500 deductible requires $1,500 in out-of-pocket payments before coverage kicks in. Note that policies cover preventative care before you meet the deductible. Sorry, but you can’t get out of your physical that easily.

Copays — Copays are the payments you make to medical offices when you go in for scheduled appointments. Copay amounts vary, and not all policies require them. They also do not count toward deductibles.

Coinsurance — Coinsurance is the percentage of medical bills not covered by a policy. A patient with a 15% coinsurance rate pays $15 of every $100 in medical bills incurred. This rate applies after meeting the deductible.

Maximum out-of-pocket limit — Health insurance policies carry limits on the total amount a patient can pay out of pocket annually. In 2019, the maximum threshold for single policy owners is $7,900 and $15,800 for family policies.

Premium — Premiums are regular payments made to keep a policy active. They’re paid on a monthly, quarterly, or annual basis.

Out-of-network — Insurance companies work with networks of medical providers who offer discounted services to covered patients. Policies may not cover services that out-of-network healthcare providers perform .

The next step to understanding health insurance is to remember it’s not a catch-all for medical costs. Even if you’re able to secure a policy with a low premium, an affordable deductible, and minimal copays, you could still find yourself with medical bills. Having a funded emergency reserve to absorb these costs can be a smart way to avoid a financial crisis during or after an accident or health emergency.

The final step to understanding health insurance is one that many Americans struggle with. It’s a good idea to never view health insurance as an optional expense. In 2018, 8.5% of Americans didn’t have health insurance. A portion of uncovered citizens are unable to afford coverage premiums. But some are making a conscious decision to go without insurance. The potential downside? An astonishing 66.5% of bankruptcies are linked to medical issues. You know what they say, “The only thing riskier than jumping out of a plane is jumping out of a plane without health insurance.”

Two Main Types: Individual and Employer-Based

Now that you understand the basics, it’s time to look at different types of coverage along with their unique advantages — and potential pitfalls.

Employer-Based Health Care

For many Americans, signing up for employer-based health care coverage makes sense. Most employers offer health coverage to attract and retain top talent, and plans are often competitive throughout an industry. Plus, employers often pay for some or all of their employees’ monthly premium costs and eligible employees are never denied coverage. They have the freedom to choose between the different plans their employers offer at different price points.

However, employer-based health care plans often leave insured parties with less power of choice. Employers are the ones making decisions about which coverage to offer as well as possible service restrictions.

Individual Health Care

For some, employee-based health care isn’t an option. Their employers may not offer coverage. Or they might not meet the requirements for benefits — for example, if they only work part-time hours — or the individuals could be self-employed and responsible for seeking out their own insurance.

If you believe individual health care is the best — or only — coverage option you have, there are several ways to go about obtaining a policy. 

The Exchange — Also known as the Marketplace, the Exchange is a service available to those looking to shop for and enroll in affordable individual health insurance. While many turn to the federal Exchange, some states — including Colorado — have their own Marketplace where residents can purchse coverage.

An insurance advisor — Working with an insurance advisor can provide a more personalized experience, allowing you to discuss your budget, health care needs, and policy preferences.

When choosing an individual health care plan over an employee-based option, you’re able to shop around. You can find a plan that matches your coverage needs and budget on a more in-depth level.

There is one final health care source to know about, if you’re eligible. Medicare is a federal health insurance program that provides coverage for:

  • People over 65
  • Younger people with certain disabilities
  • People with end-stage renal disease

Different parts of Medicare exist, all of which provide coverage for unique services. Depending on the parts selected, Medicare can help with accrued costs from hospital stays, home health care, preventative services, outpatient care, and prescription drug coverage.

How You Can Find the Right Coverage

Ready to find the best health care coverage for you? No matter your budget, premium prices are often the first aspect of insurance to consider when shopping for a policy. If purchasing coverage through the Exchange, companies consider five factors when determining your individual premium.

1. Age — With age come higher risks for certain ailments and, as a result, premiums typically rise.

2. Geography — Where you live can have a drastic effect on your premium. Insurance companies factor in cost of living, local legislation, and cultural considerations.

3. Smoking status — Those who use tobacco will almost always face higher premiums.

4. Family size — A policy for a single individual tends to have a lower premium than a plan that also covers a spouse and/or dependents.

The fifth factor insurance companies on the Exchange consider when determining a policy’s premium is the plan category. There are five plan categories: Catastrophic, Bronze, Silver, Gold, and Platinum.

Bronze categories have lower monthly premiums but higher out-of-pocket costs while Gold plans have lower out-of-pocket costs with higher monthly premiums. Catastrophic health insurance plans have even lower monthly premiums with higher deductibles than Bronze plans. This type of coverage can make sense when you’re on a ramen-noodle budget but still want to protect yourself from serious injuries or illnesses.

When choosing a health care plan, you’ll also want to know about HSAs and FSAs.

HSAAn HSA is a health savings account that you can use to help with medical costs. You own the account but must have a high-deductible health plan to qualify. While your employer can contribute to it, you must report the account when you do your taxes.

FSA — An FSA is a flexible spending account owned by your employer that you can both add money to. You can use the funds for uncovered medical costs after insurance. You don’t need to report FSA funds on your taxes and don’t need to have a high-deductible health plan to open and use one.

The big question everyone seems to have about health insurance is whether they should opt for a policy with a high deductible and low premiums or vice versa. There’s no universal answer, but asking yourself the following questions can help.

How is my current health?

Insurance covers preventative care appointments even before you meet the deductible. So if you’re healthy, a high deductible plan with lower premiums can provide peace of mind without throwing off your budget.

Am I preparing for a medical event?

Certain seasons in life warrant a certain type of health insurance plan. For example, if you’re pregnant or planning to become pregnant, having a low-deductible health plan can save you money in the long run. You may also want to also look for a low-deductible plan if you have a chronic condition or find yourself in need of care more often than not.

Is saving money now or later more important?

Depending on your budget, being able to save money on a monthly basis could be more important than potentially saving on future medical expenses. But for some, paying more each month for additional peace of mind is worth the extra cost.

If you’re having difficulty deciding what type of health coverage is right for you, you can turn to your financial professional. He or she can help you determine what you can afford on a monthly basis for your premium and what you can do now to protect your assets from unexpected medical bills.

When drafting and executing a strong financial plan, health insurance should always be a factor. By learning all you can about coverage, exploring available policy options, and speaking to a financial professional, you can be better equipped to make a wise choice for yourself — and your health.

If you have questions about how health insurance fits into your financial plan, feel free to try the chat feature at the lower-left corner of this page. 

Want to learn more about planning your financial future? You can visit our How It Works page for information, then simply schedule your no-cost initial financial planning consultation.

Jason Speciner
Jason Speciner
jason@fpfoco.com

Jason Speciner is a CERTIFIED FINANCIAL PLANNER™ professional, an Enrolled Agent, and the founder of fee-only firm Financial Planning Fort Collins. He is also a member of the National Association of Personal Financial Advisors (NAPFA), Financial Planning Association (FPA), and XY Planning Network. Since 2004, he has served clients of all ages and backgrounds with unique experience working with members of generations X and Y. To learn more, check out Jason's blogs and see the media he's been featured in.