In Health Insurance Unraveled Part 1 we discussed the most basic component of your health insurance, the premium. As a recap, the premium is simply the amount it costs for you to purchase the insurance plan. Think of it like a membership fee. The money you pay for the premium does not go toward paying for your individual healthcare expenses. In this post, we are going to learn about the deductible.
Put simply, the deductible is the amount of money you have to spend on healthcare costs before your health insurance will pay anything. So, if your yearly premium is $1000 and your deductible is $500, then you will have to pay $1500 before the insurance company pays a dime. Now, a caveat to that is if you make a monthly payment for your premium. In this case, you would be paying approximately $83 per month for the premium and still have to pay $500 before the insurance company will pay anything.
Deductibles, just like premiums, vary from plan to plan. The amount of the deductible is calculated based on how high of a risk the customer is. The risk of each customer that buys insurance from a company, is put together in a risk pool. The higher the level of risk in the pool, the higher the premiums and deductibles may be.
For example let’s look at the risk level of two “pools:”
- Pool I: 10 people
- 3 smoke
- 4 have been diagnosed with high blood pressure
- 2 have had a history of cancer
- Pool II: 10 people
- 1 smokes
- 2 with high blood pressure
- 1 with a family history of cancer but no cancer for the individual
In these two examples, the people who belong to Pool II will likely pay less to be insured than those in Pool I. Now this is very basic as many other factors such as age and gender affect the level of risk in the pool as well, but you get the idea.
The money you pay in premiums and deductibles fund the insurance plan. Therefore, when medical expenses need to be paid by the insurance company for anyone in the pool, the money is there. Premiums and deductibles are also a way to make the customer take some responsibility for the cost of their own healthcare.
The amount of premiums and deductibles are often related. For example, a plan with a less expensive premium might have a higher deductible. This is usually geared toward healthy individuals who mainly purchase insurance for the catastrophic what ifs. For example, a 25 year old with no medical issues may decide to purchase a plan with a $500 premium, but have a $2000 deductible. The risk of this person needing extensive medical care is low, so they might elect to pay a low premium and pay for the few doctor visits and occasional medication out of pocket. On the other hand, someone who has diabetes and uses insulin and other prescription medications to manage their illness, may decide to pay a $2000 premium with a $500 deductible. This person is higher risk and knows that their medical expenses will most likely exceed $500 per year. Once they cover that $500 portion out of pocket, the insurance company will then cover other expenses that may arise. (Full disclosure, I made up these figures for easy math!)
So how do you choose a high or low deductible plan? It really depends on your level of risk and how much control you want to take over your healthcare spending. A low deductible with a high premium will cost more to gain membership to the pool, but will cost less out of pocket for medical expenses. A low premium with a high deductible will cost you less to gain membership to the pool and you will likely pay out of pocket for services for the entire year unless something major happens.
If you elect a high deductible plan, you can participate in a Health Savings Account. This is a certain amount of money you would set aside in an account specifically for those out of pocket expenses in a high deductible plan. A health savings account (HAS) is tax exempt. Therefore, when you get to the end of the year, you don’t really need to worry about itemizing the medical expenses for the year. You get the tax benefit by lowering your income amount by the money you contribute to the HSA.
I hope you have found this helpful. Stay tuned for my next post where we will get into copays and coinsurance. Fun stuff!! Please comment below and let me know what you think or if you have any other thoughts.