Spending money on health is extremely important, but also very expensive. And if you don’t have health insurance, you’re in for quite an expense.
Having insurance coverage is now a necessity for most households because of the unexpected amount a person may have to pay for treatment, surgeries or even routine checkups. Let’s go step-by-step.
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How does health insurance work?
Health insurance is basically payment protection given to a policyholder which covers routine hospital visits, treatments and surgeries, medical bills and prescribed drugs. However, it does NOT cover surgical or beauty treatments- unless stated otherwise in the policy.
A policyholder is required to pay premiums each month or year to keep the policy in force. Just for however long the duration of the policy is, premiums are to be paid promptly.
However, there are three interesting components in health insurance:
- Out-of-pocket Maximum
Let’s discuss what these three are and how they come into play with health insurance.
What is Deductible?
A deductible amount is one of the health insurance components. The amount is set when you’re buying a health plan initially, and you usually start with the deductible amount of $1000 and up. This is the amount you will pay on the medical bills BEFORE the insurance company starts offering you coverage. So if your total medical expense is $1200, you will pay the first $1000 and the insurance company will pay the remaining $200.
The higher your deductible, the lower your premiums. And vice versa. Many people set the lowest deductible possible because having to pay the least amount up front, but that means the monthly premiums are going to be relatively higher.
What is Coinsurance?
Determined by a percentage, this is the amount that you pay AFTER paying the deductible amount. Usually the percentage split is 80/20- meaning that whatever amount is left after paying deductibles, the remaining will be split: 20% will be paid by the insured, and 80% by the insurance company.
What is Out of Pocket Maximum?
Out of pocket maximum is the other component of health insurance, this is basically the maximum amount that you can pay before the insurance coverage kicks in. After the out of pocket reaches its maximum limit, the insurance company takes over all financial expenses of medical bills.
The out of pocket maximum amount does NOT cover premiums- which means no matter how much your deductibles are or how much your out of maximum limit is, you are liable to pay premiums for the time of the policy to keep it in force.
Rates as per 2020, the out-of-pocket maximums are $8,150 for individuals and $16,300 for families. These limits have increased from $7,900 and $15,600, respectively, from 2019.
Let’s think of it in an equation setting.
Out of pocket maximum = deductibles + coinsurance
Now let’s fit in this equation into a real life example and do the math!
Mason has an important health surgery which costs him around $10,000. Suppose his deductibles are $2,000 and a coinsurance of 20%.
Out of the $10,000 he will pay $2,000 himself, before his insurance coverage starts. With the remaining $8,000 he will also pay the 20% coinsurance, which will be $1,600. The remaining $6,400 will be paid by his insurance company- if he DIDN’T have out of pocket.
Let’s see what happens if he does have an out of pocket amount of $2,500.
His annual expenses are capped at $2,500. Now since he has already paid the deductible of $2,000, he will now pay the remaining $1,500 and the insurance company will cover everything else if he HAS out of pocket insurance.
What you have to understand from this example above is that the higher your deductible and out of pocket insurance is, the lower your premiums will be. But if you want a greater chunk to be covered by the insurance company, be prepared to pay very high premiums each month.
In easy words the only difference between deductible and out of pocket maximum is that the deductible is the amount you have to pay before the insurance company jumps in and the out of pocket maximum is when the insurance company pays AFTER you have exhausted your maximum limit.
No Deductible Health Insurance
Is it still wise to go for a health insurance plan with no deductible?
If you’re someone who has frequent doctor visits and lots of routine checkups, having a low deductible health plan will be a good option. This means you don’t have to cover any minimum cost yourself before the health insurance company starts paying off your expenses.
But if you’re a healthy individual who may not get severely hurt during the course of the policy, you should pick a high deductible health plan. Why? So that you can keep paying very low premiums until the end of the policy.
There is also a no-charge after deductible feature which says that once you have exhausted all of the deductibles during the year, all other injuries or medical expenses will be 100% covered (for the course of that year only).
So what should you do?
The logic is clear, more deductibles and out of pocket insurance, less premiums.
When a person has hundreds of other expenses lined up for the month, paying a high amount of premium can really shake your budget. In such circumstances, knowing the financial condition of your family, you would want to opt for a low premium health plan. So if in a situation that you’re met with a tragedy, the insurance company will take charge after you’ve paid the deductible.
This is however not a good option for people with risky professions- people who have higher chances of getting physically hurt like a racecar driver or a wrestler. Such people should go for a low deductible plan so that in case they’re met with an accident, the insurance company pays for a larger chunk.