Is A Catastrophic Insurance Plan Right For You?
In this down economy, it may seem practical to choose a health insurance plan that has the lowest monthly payments. However, plans that have the lowest monthly premiums also typically have the highest deductibles. For some individuals and families, this may be a good option but for others it could lead to a medical and financial disaster.
“Catastrophic” and “High Deductible” health plans essentially refer to the same plan. It is sometimes called “catastrophic” because it pertains to the occurrence of a catastrophic event such as an illness or a debilitating injury. It means that during this event, you will at least have the minimum health insurance to help you cover the high costs of hospitalization and recovery.
To determine if a high deductible or catastrophic health insurance is right for you, it is important to understand what it is exactly and who benefits most from it.
How Does Health Insurance Work?
When looking into a health insurance plan, it is important to look at the premium, deductible and copay. The premium is the monthly amount you pay to your insurance company. The deductible is the amount that you will cover from your own money before an insurance company is required to pay for your accident or illness.
When it comes to copays, there are generally two types, there is a big difference between a copay and coinsurance. The first is a nominal fee ranging from $12 to $25, but can sometimes be more or less. This initial copay is the beginning of the rest of the payment process. The second type is based on a percentage. Also called coinsurance, this type of copay can be on an 80/20 basis, but again there is a range in this as well. This means that once you have past your deductible, your insurance company will pay 80 percent of the bill while you are liable for the 20 percent.
It is important to remember that a health insurance company is a business that operates on maximizing its profits. To do this, it will attempt to collect as much money from you while paying as little out as possible during an accident or sickness.
However, how will they entice you to go with their health insurance company if you are unable to afford their monthly premium? So, these companies will lower your monthly premiums but will require you to pay a higher deductible. This means the company does not have to pay anything out unless a high deductible threshold has been met.
When choosing the right insurance plan, it is important to determine the “risk” you are willing to take on. This risk is assessing the number of times that you will dip into your insurance plan during an illness or accident. It is also how much you are able to afford to pay out of pocket before reaching your deductible threshold.
So, a plan with a lower deductible but a higher premium means that the insurer is obligated to pay more on your behalf but you are paying more monthly. This means that you believe that you have a high incidence of getting sick or getting into an accident that it is worth to pay the higher premium.
In the case of a catastrophic or high deductible health plan, this is the opposite. You will pay lower premiums yet the deductible is much higher. This means that you believe that your incidence of sickness or getting into an accident is fairly low so you are willing to save more by paying a lower monthly rate. This also means that when you get into an accident, you will have to pay more out initially until the deductible is reached and the insurance company is obligated to pay.
Let’s Look At the Numbers
To determine and better understand the difference between a typical insurance plan and a catastrophic insurance plan, it would be best to compare them with some numbers. In this sample scenario, you had to go to the doctor for a visit and a prescription.
If you had a typical health insurance policy your monthly premium is $800 while your deductible is $400. Since you had to visit the doctor, you had to copay an amount of $30 and a prescription fee of $20 and the rest is paid by your insurance company. For that month, if you did not see a physician anymore, your fees would amount to $850.
On the other hand, if you had catastrophic health insurance, with a monthly payment of $400 and a deductible of $2,400 in the same scenario, you will have to pay more for your doctor’s visit which could amount to $100 or more and the prescription which is going to cost you $150 since you do not have any prescription coverage. Since your deductible is so high, you will have to pay for the entire visit out of pocket. Your total fees for that month are $650.
If you only visit your doctor occasionally, then the catastrophic health plan is a much better deal. However, if you end up in an accident that requires expensive surgery, then those copays are the least of your worries. With a high deductible health plan, you will have to pay $2,400 and 20 percent of the subsequent medical bill which could possibly reach the thousands. But with a regular health plan, what you pay is far less.
There is so much variation in insurance policies and this is just a quick example, so don’t get too caught up in this one example since every single insurance policy will be different. It is best to sit down with your own insurance options and figure out best and worst case scenarios for you and your family to help you better decide what health insurance policy will be best for you.
Will A Catastrophic Health Plan Work for You?
For individuals and families who are relatively healthy and do not require numerous visits to the doctor, prescriptions and stays in the hospital then a catastrophic health plan may be more ideal. However, for individuals and families who have many medical challenges and are easily susceptible to sicknesses and accidents then it would be best to choose a regular health plan instead.
Personally I have been going with high deductible plans. There was one year that we actually had a few emergency room visits and we ended up hitting our $5,000 deductible, but the other years have been kinder to us. It is hard because if we had that magic crystal ball and could see the future we could more easily decide what health insurance policy would be best, but since we do not we have to make an educated guess at it. I really like catastrophic health insurance, but I always have the extra money on had to take care of emergencies if and when they do arise. I also have a health savings account set up to help me along the way.. But it all depends on your own personal and family situation. You really have to sit down with a calculator or spreadsheet and figure out for yourself what will work best for you.
What has been your experience with picking health insurance? What kind of insurance policy do you go with, or do you just go without?
Author: KC Beavers
KC Beavers is a semi-retired entrepreneur. The subject of personal finance has always fascinated him. In an effort to not bore those around him with all his love of personal finance as much he has come here to bore all of you instead.