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Health insurance is designed to protect you from the financial risks associated with illness and disability by offering a way to reduce medical costs to more reasonable amounts.
Health insurance is most commonly sold under group benefits. Most health insurance plans will require that you pay some of the costs of covered medical services, which is called cost-sharing. It will vary between different types of health plans, but most will include a deductible, copayment and out-of-pocket-maximum. More specifically:
In addition to regular premium payments, visits to a medical facility will result in out-of-pocket expenses you will need to cover. These are deductibles, coinsurance and copay.
A deductible is the set amount that you must pay before your insurance company starts covering your medical bills.
For example, if your health plan has a $2,000 deductible and your medical bill totals $5,000, you will need to cover $2000 and your insurance company will pay the remaining $3000 of your medical bills. If you have already paid $2000 in medical bills that year, you will only pay an amount equal to coinsurance or copay while your insurance will pick up the difference.
Your deductible will also determine what your insurance premium is – or your monthly insurance costs. By tweaking around the deductible when choosing a policy, you can manage your insurance cost. While it’s convenient to have a lower deductible, they usually come with higher premiums. You can lower your insurance costs by choosing a policy with a higher deductible and self-insuring instead. Finding the optimal balance between a deductible and premium to fit your personal preference and financial circumstances is essential.
After you’ve reached your deductible level, you will start paying coinsurance for some types of healthcare service, usually less routine ones such as hospitalization or some medical treatments. Coinsurance is a percentage of medical expenses you will pay for each of these medical services after you’ve paid your deductible and until you meet your out-of-pocket maximum for the year. For example, if you have a plan with a 20% coinsurance, you will pay 20% of a medical bill, while your health insurance will cover the remaining 80%. Your out-of-pocket maximum for the year is the maximum dollar amount you can pay in any given year. This means that you will continue to pay the coinsurance until you reach this amount of expenses.
Some medical services, usually routine ones such as doctor visits or prescriptions, will be subject to a copay instead of coinsurance. Copay is a fixed amount you need to pay for each of these covered medical services regardless of your deductible. The insurance company covers the remaining amount. What you pay in a copay may or may not count toward your deductible, so make sure you check that before you receive a medical service. For example, if you have a $20 copay for a visit to the doctor’s office, you must pay this amount at each visit, in most cases even if you already met your deductible.
A limit is a cap on the benefits the insurance company will pay, which can be annual or lifetime. However, under the current law, lifetime and annual limits on all essential health services are prohibited as well as many services that may not be considered essential. For some non-essential services, your insurance may express an annual limit as a dollar amount of covered services or as the number of medical visits covered. Once you reach the annual limit, you must pay all health care costs for the rest of the year. Lifetime maximum refers to the maximum dollar amount that your insurance company will pay you for healthcare services during your life. Annual and lifetime limits do not apply to essential health services.
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