Let Me Clarify
One topic often overlooked in financial planning is the importance of health insurance and the decisions surrounding it. From a financial standpoint, an individual’s health can directly impact current spending and savings (the structure of premiums and out-of-pocket expenditures), the ability to utilize Health Savings Accounts (medical related investment accounts), and how much one should save to cover their long term expenses based on life expectancy. While these are just a few specific examples of how health relates to wealth, it all begins with having a basic understanding of the terminology associated with insurance.
Let me clarify.
We all know how complex and confusing insurance can be. So, how can you be sure that you are choosing the right plan for yourself or your family without a foundation of basic knowledge when it comes to understanding and comparing the options you have? All too often plans are chosen for simple reasons like “I’ve always used this plan” or “my parents told me this is best” or even “it was the most expensive, so it must be the best”. Unfortunately, one size does not fit all, especially in the world of insurance.
To start you off on the right foot, below are some of the most important terms to begin with when evaluating your options.
Premiums are what you pay each month (or paycheck) to simply be covered by your insurance plan. While you may be inclined to choose the plan with the cheapest premium, keep in mind that there are trade-offs when it comes to the structure of your overall costs and coverage, which is why the remaining items should also be considered.
The deductible amount outlines how much you (or your family) are expected to pay out-of-pocket before any medical costs are partially paid by the insurance company. Typically, the tradeoff is having lower premiums and a higher deductible, or vice versa. Also be aware that certain plans apply deductibles at the individual level, while others apply them at the household level. This means that some family plans have one large deductible that must be met before anyone shares costs with the insurance company and other plans have a smaller deductible that each individual can satisfy in order for the insurance company to share in costs.
Co-Insurance is the amount you pay for covered costs after your deductible is met. For example, a 20% co-insurance rate means that for those covered costs, you would pay 20% of the total cost and your insurance company pays the other 80% after you meet your deductible amount.
Copays are a bit of an exception to the explanation of deductibles and co-insurance. Typically associated with higher premium plans, services subject to a copay require you to pay a flat dollar amount, regardless of having met your deductible or co-insurance amount. If your plan option states that your primary doctor has a “$20 copay”, then you simply pay $20 at the time of your visit, regardless of the physicians’ rate. Please note that additional costs (prescriptions, lab tests, etc.) associated with that visit may be billed separately.
Your Out-of-Pocket Maximum is the limit on how much you have to pay out-of-pocket before the insurance company will cover 100% of any additional costs. For example, if your plan has a $4,000 out-of-pocket maximum, once you pay $4,000 in total (including your deductible, amounts you’ve paid in co-insurance and copays, and other out-of-pocket costs), your remaining costs for the year are covered by your insurance company. It is especially important to know if your doctors are considered “in-network” or “out-of-network” as these costs are treated separately and typically have separate out-of-pocket maximums.
Of course, there is more to consider when selecting the right health insurance plan option. This could include your current cash flow situation and the structure of making payments, what networks your doctors are members of, your anticipated medical needs based on your situation, and prescription needs, just to name a few.
With open enrollment season coming up, and Health Literacy Month upon us, I encourage you to take the time to understand your options, compare your expected costs based on your typical usage, and to consider this as one small step in the right direction of your financial future.
I encourage you to submit any ideas, topics, or questions to firstname.lastname@example.org. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. “Let Me Clarify” is a weekly blog containing Chad Baxter’s insights and thoughts about a variety of topics. To learn more about Chad, click here