What You Pay: Part 1 – Health Insurance Premiums
We hope you join us over the next 3 weeks for a new 3-part series called, “What You Pay.” We’re going to talk about all of those healthcare terms you’ve heard – terms like copayments, coinsurance, and premiums – and tell you how they impact your wallet.
What is a Health Insurance Premium?
A premium is the amount of money you pay your health insurance company to have their health insurance coverage.
If you have healthcare through your employer, they’ll usually split this cost 70/30 with you. They pay 70% of the premium, you pay 30%. If you’re self-employed or on COBRA, you’ll pay the full 100% of your premium. The average premium for individual coverage is about $6,400 a year. For a family plan, that cost jumps to a whopping $9,600-$11,000 a year.
Where Does the Money from Your Premium Go?
About 80% of your premium goes towards paying for your medical claims. The other 20% is for your health insurance plan’s administrative costs – things like their salaries, having their name on that billboard, and their office buildings – as well as paying taxes and their profit.
Insurance through Your Employer
If you have health insurance through your employer, your premium will be taken out of each paycheck. Collectively, the premium is based on the type of coverage you and your employer chooses, whether you have an individual or family plan, the overall health status of you and your colleagues, and possibly a few more factors depending on your employer.
If you purchase your health insurance on your own or are on COBRA, you pre-pay your premium each month for the next 30 days. Like we said earlier, you don’t have an employer to help with the costs, so you’re shouldering 100% of the premium each month. Remember, your insurance company calculates your premium so that they have enough money to pay for all the care you receive, as well as their own costs and profit.
Insurance Risk – What is That?
One of the factors your insurance company considers when calculating your premium, is how much risk do they take? The risk is the dollar amount paid for care that was not expected by the insurer. Based on your age, gender, etc. the health plan can project how much care you might need. Then build that projection into your premium. But if they guess wrong, and you need a lot more care, they could end up spending more than your premium.
Premiums vs. Deductibles
Let’s take a moment and bring out the kid inside of you. Imagine you’re on a playground and you hop on a see saw with your buddy. One side goes up, and the other goes down; premiums and deductibles kind of work together like that.
Usually, if you have a lower premium, you’re going to have a higher deductible. When you have a higher premium, you’ll have a lower deductible.
High Deductible Health Plans
When choosing a health insurance plan, you’ll have several options to select from. For example, Plan A has a low premium, meaning you’ll pay less up front, but has a high deductible ($2,500). This is called a high-deductible health plan or consumer driven health plan (CDHP).
What does this mean? This means you will pay less out of each paycheck (or month depending on the type of plan you have), but you’ll have to pay more money out of pocket before your insurance kicks in – all of your $2,500 deductible.
Just like car insurance, you have to pay your whole deductible before your insurance starts paying. Since you have health insurance, you’ll still get quoted the discounted rate for people with health insurance.
A High-Deductible Plan Is Good If….
If you have an emergency fund – money put away for emergencies like trips to the ER – and can cover your deductible when you need medical care, a high-deductible plan may be a good option for you.
If you had the choice between a $150/month premium and a $250/month premium, you could choose the lower premium and put that $100 extra a month away so that when you do need care, you’ll have the cash on hand to pay. High-deductible plans like we talked about above are becoming very popular, so that’s all your company may offer.
On Second Thought…
If you’d rather not take the risk, or if you don’t have a large sum of money on hand, a lower premium/high deductible plan may not be right for you.
Higher Premium / Lower Deductible Plan
There’s usually another type of plan available where you can pay more up front (a higher premium) and have a lower deductible amount. We’ll discuss the things you should consider when choosing a health plan in a future blog.
This type of plan is good if….
If you know you’re going to need significant medical care (Ex: surgery, having a baby, etc.) and you don’t want to spend a big chunk of money on a large deductible, you may want to opt for paying a little more up front (a higher premium), and having a lower-deductible plan.
We’ll spend more time later discussing the things you should consider when choosing a health plan in a future blog.