Making Sense of Premiums and Deductibles

For many people, buying their own health insurance comes down to one important question: “What’s it going to cost me?” And often they are met with these words, “premium” and “deductible.”

You shouldn’t buy a plan on price alone. Getting quality coverage that meets your health needs should be a priority. But there’s no escaping it — your health plan’s price tag needs to fit your budget.

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When you’re comparing health plans, the first two numbers to look at are the premium and the deductible. They aren’t the only numbers to pay attention to, but they’ll make up most of the cost of your coverage.

Understanding Premiums

A premium is an easy concept: it’s the monthly bill you pay to keep your coverage in effect. But how that premium is calculated can be complicated.

Health insurance premiums don’t have a fixed price — they depend on several factors. The factors are all related to your risk of needing expensive health care. These factors include your current health status, your age, and your lifestyle. Some companies even assess risk based on where you live.

The process of deciding how much risk you have — and pricing your premiums to match that risk — is called medical underwriting. It’s important to remember that each company has a different set of rules they use for underwriting. What one company considers high-risk might only be a moderate risk for another company. That can mean a big difference in your premium. So it pays to compare options from several companies.

Understanding Deductibles

A deductible is the fixed amount of medical costs you are responsible for paying before your insurance coverage starts picking up the bill. For example, if the total bill for a simple surgery were $5,000, you might have to pay the first $500 before your insurance company pays the remaining $4,500.

Deductibles can range from a few hundred dollars to several thousand. Many health plans offer a choice of deductibles. You’re only responsible for the deductible when you receive care.

When you’re looking at plans, pay attention to the medical services that are covered without having to pay toward your deductible. Many health insurance plans will cover routine and preventive care, and only require you to make a small copayment. This care can include doctor’s visits, lab work, and other basic care that keeps you healthy.

How Premiums and Deductibles are Related

Is a lower deductible better? Not always.

Premiums and deductibles are directly related. A plan with a low deductible will have higher premiums. So many people choose plans with high deductibles in order to keep the monthly cost of coverage as low as possible.

If you do choose a plan with a high deductible, consider opening a Health Savings Account. These accounts allow you to save money tax-free and help pay for health care expenses — including your deductible. As of 2008, your plan needs to have a deductible of at least $1,100 for you to open a Health Savings Account.

Want to find out more? Get a free online quote and compare plans from the top insurance companies in your state. See which companies offer the kind of coverage you need — and see how much they charge for that coverage. Or use one of our other insurance tools to find your health insurance plan.