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An insurance policy is a written contract with an insurance company. The policy spells out what is and is
not covered. Coverage is what the insurance policy will pay for. Most health insurance policies provide
coverage on a yearly basis and charge premiums monthly or quarterly. The premium is the cost of the
contract or policy. It refers to the amount people pay to have health insurance whether they use it or not.
In situations where policyholders want their insurance policy to pay for a loss, they will file a claim. Claims
can be accepted or denied depending upon the amount of coverage available, policy exclusions, and other
factors. Most insurance policies require policyholders to pay a part of each claim. The deductible is the
amount that an insured person will pay before the insurance company pays. Generally speaking, the higher
the amount of the deductible, the lower the premium for a specific amount of insurance. By choosing a
higher deductible amount, policyholders are indicating a willingness to assume more out-of-pocket costs.
High deductible health care (HDHC) plans have somewhat lower premiums than traditional plans.
However, the deductible, or amount that a consumer pays before insurance pay benefits, is higher than the
deductible of conventional plans. High deductible plans are often tied to Health Savings Accounts or HSAs.
HSAs are tax-free employee savings accounts to cover deductibles and other out-of-pocket medical costs.
Two other key health insurance terms that are often confused because they sound similar are copayment
and coinsurance. A copayment is a specific dollar amount charged for a health care product or service.
Examples include a $10, $15, or $25 copayment for prescription drugs or for a doctor’s office visit.
Coinsurance is the percentage (e.g., 20%) of a covered service that a consumer is expected to pay up to a
specified maximum amount known as the stop-loss amount or out-of-pocket maximum. A typical
coinsurance cost split is 80/20 with the insurer paying the larger percentage (80%). For an $8,500 medical
bill with a $250 deductible and 80/20 coinsurance with a $5,000 limit on out-of-pocket costs, a consumer
would pay $1,250 ($250 deductible + $1,000 coinsurance; 20% of $5,000) and the insurer would pay
$7,250 ($4,000 coinsurance + $3,250 remaining charges above the out-of-pocket maximum).
Some policies should be avoided because they are extremely costly, narrow in scope, and/or redundant.
Types of policies that generally fall into this category include so called “dread-disease” policies that cover
only named illnesses (e.g., cancer), accidental death insurance, and policies that pay a limited amount of
daily coverage that is far less than typical health care expenses.
When selecting a health care plan, consumers should follow the “Rule of Three” and compare at least three
policy providers. When comparing policies, they should look for coverage that best aligns with their
financial resources (e.g., amount of emergency savings), health history, and expected family medical needs.
Under the Affordable Care Act (ACA), all Americans (with a specific set of exclusions) are expected to
maintain health insurance. The health care plans available in ACA Marketplaces (i.e., online “stores”) are
sometimes referred to as “The Metals” because of the names given to the four tiers of coverage. As with the
Olympics, where metals indicate a different level of quality, the metal tiers vary in the amount of cost-
sharing between insurance companies and patients. Plan range from Bronze to Silver to Gold to Platinum.
The real difference between each metal tier is that each metal represents the percentage that an insurance
company will have to pay versus the amount a person will have to pay out-of-pocket. A Bronze Plan will
cover 60% of health care costs with the consumer responsible for paying 40%. For Silver plans, insurance
companies will pay 70% of costs and the consumer pays 30%.
For Gold Plans, the split is 80% insurer-20% consumer and, for Platinum plans, the split is 90%-10%. In
general, the higher percentage of expenses that an insurance company covers, the more the consumer will
pay for the premiums but the smaller the out of pocket expenses are likely to be. Platinum plans are best for
people who plan to use a lot of health care services and Bronze plans are best for those who don’t plan to.