The changing dynamics of the health field make health insurance a really smart option. The dental field is a different matter. Typically with dental insurance, premiums are high, deductibles are high and yearly maximums are low. Unless your company pays for your dental insurance, a dental discount plan is usually a better option.
Comparing Deductible, Co-Pay, and Co-insurance When Looking at Your Health Insurance Benefit Options
If you’re covered by a health plan, you’ve probably encountered the words deductible, co-pay, and co-insurance a number of times when examining your bills, paying your doctor for a visit, or simply looking at the benefits package from your employer. These terms can be a bit confusing, and with all of the limits, maximums, and different coverage options, it is important to understand what they mean so you can obtain the best coverage for the right price.
When looking at your health insurance options, it’s important to go beyond the premium. The premium is the amount you pay each paycheck or month just to have the coverage. Obviously, you want the lowest premium you can get for the coverage you want, but you really need to look beyond that. Saving $20 a month on your insurance premium may end up costing you hundreds of dollars in co-pays or out-of-pocket expenses. So, let’s take a look at how you can make sense of all these terms.
Defining the Terms
This is probably the most straightforward, and easiest ways to change the premium on your policy. The deductible is the amount that you need to pay for a claim before the insurance kicks in. If you have a $50 deductible and you are billed for $500 in services, you’d need to pay $50 out of pocket before the remainder is sent off to the insurance company.
Obviously, the higher the deductible you choose, the lower your premium will be since you’ll be covering more of the expenses out of pocket. So, you have to be careful. If you choose a high deductible in an effort to keep premium costs down, a period of poor health or unexpected medical treatments could add up quickly.
Don’t forget the maximums. Deductibles usually have an annual maximum, for both individuals and families. When comparing plans or options within your plan, determine how likely it would be that you’d reach those maximums, and if two plans have different maximums, think about which one provides the best cost-to-benefit ratio.
Co-pay and Co-insurance
The co-pay is probably another common term you’ve heard, and have probably paid a number of times without thinking much of it. Co-pay and co-insurance are basically the same thing, but cover different items. In either case, this is the amount of money you have to pay for a claim or service rendered. The difference is that a co-pay is typically a flat dollar amount for a specific item such as an office visit, exam, or prescription. Co-insurance is typically based on a percentage. This means that you’re responsible for a certain percentage of a claim, and the insurance provider is responsible for the rest.
Again, when comparing plans, the co-pay amount or co-insurance percentage can play a big role in how much your premium is. A plan with an 80/20 co-insurance (insurance company pays 80%, you pay 20%) will have a higher premium than a 50/50 plan, and so on.
Compare All the Numbers
So, when you’re exploring your health insurance options, it pays to look at more than the premium. While the premium directly affects your bottom line, saving a few dollars on the premium could cost you much more in the long run, and paying a higher premium for coverage you might not need may also cost an unnecessary bundle.
This is especially important if you have a certain condition that requires specific tests or drugs, or if you are planning on having a baby, as the amount of coverage provided for these items may require digging a little deeper than glancing at your premium. So, take the time to completely understand your health benefits, and you can be sure that you’re getting as much coverage as you need, and paying no more than you have to.
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.
One of the main problems of a high deductible is that it doesn't allow for quick access to coinsurance. you have to meet the designated amount before you start to realize the benefits of the plan. Sure, the premium is lower, but for lower income families it is sometimes hard to come up with say $200, $300 or $500 before your insurance kicks in.
I think it's misleading to say that a co pay and co insurance are basically the same thing. A co pay is a flat dollar amount that does NOT apply against your deductible or out of pocket maximum. It a convenient privilege of insurance plan. Co insurance on the other is a percentage of the total bill that is payable by the insured person that usually kicks in after the deductible and applies to the out of pocktet maximum. That's a huge different. With group plans; co pay features often drive the utilization on the plan and are limitless meaning that you never stop paying them. Co insurance based plan put a limit on the amount that you pay out of pocket and these are the plans that show their true value when insurance is most needed. Co insurance is a way to stop the insured from nickel & diming the plan or abusing it.
In general we find that the high deductible plans typically only make sense if you are young, healthy or wealthy. When setup right a high deductible plan couples with a HSA can really save money on health insurance premiums while providing a nice tax break. Most people rush into buying health insurance because they do not want to spend a few hours getting comfortable with the various plan options and confusing terms. A few hours on the front end can really help in making sure that you get a plan that is both afforable and meets your needs.
The simple fact that the system is so complicated and confusing is a testiment to why we need some reform to the system.
Thanks for the guide though. My employer offers nothing short of 14 plans.
Coinsurance is a type of insurance in which the insurer and the insured split risks with each other.
Thanks so much for this. I'm graduating college soon and have to look at the insurance options of potential employers. I discovered that I had no idea how insurance worked, even though I knew I needed to get it! P.S. I love this blog
Good look into deductibles and co-pays. In my opinion, on less risky things, a higher deductible is the way to go. If you save some of the money as the previous commentor said, you can save up in case something happens. If it doesn't, the money is all yours.
Great summary, Jeremy. I've found that many people have a bias towards keeping co-pays and deductibles low so they don't have any unexpected large bills.
While it depends on your individual circumstance, for my family, high co-pays and deductibles were the way to go. We've saved thousands each year in premiums, more than making up the painful $40 co-pays. This strategy requires the discipline of saving - or we'd have been in trouble when someone did have to go to the emergency room a couple of years ago. Another benefit of living beyond paycheck to paycheck can be a comfort in taking the lower premium option.