Basics of Health Insurance
We recently conducted a survey and found that people find many health insurance terms challenging to understand.
So here is an attempt to explain a few of these terms that people are often confused by:
Premium: This is the amount that you pay every week or every month to keep your policy active. The premium amount is what the health insurer collects from you to create a risk pool to handle claims, expenses and commissions among other things.
Maximum policy limit: As the name implies, this is the maximum amount that the health insurance company will pay out to the insured (that’s you!).
There are two types of limits:
- Limit per claim: This is the maximum that the insurance company will pay out for any single illness or claim. If your limit is $250,000 and if you have an injury while falling down the stairs, then the insurer will pay up to that amount. If you have surgery the next month, the insurer will pay up to that amount again.
- Limit per lifetime: Any claim paid out by the insurer reduces your available limit, much like a credit card. If your limit per lifetime is $250,000 and if you have an injury while falling down the stairs and you claim $100,000 then the insurer will pay up to that amount. If you have surgery the next month, the insurer will pay up to the remainder of the amount. That is, only up to $150,000.
It is essential to know the difference and read the terms and conditions! It’s recommended to go for a maximum limit of $1 Million or more per claim.
Deductible: This is the amount that you have to pay before the insurer’s payments start to kick in. In other words, let us assume that you have a deductible of $1500 and if your first medical bill of the year is $500, then you pay for the bill in entirety. If you again go to a health care provider and this time you end up with a bill of $2000, assuming you do not have any co-pay (I will explain that soon), you will pay only $1000, and the insurer pays the remaining $500.
So, this way, you end paying the $1500 before the insurer contributes their part of the payment. Now what is this co-payment business, you ask?
Co-payment: Many health insurance plans require you to pay a portion of the bills that you receive. A “co-payment” ensures that patients have “skin” in the game and do not go to seek health care services unless they really need it. Let us assume you have taken a plan with a co-payment of 20%. Now let us assume that you have already paid off your deductible. Subsequently for another doctor visit, you get a medical bill of $1000. In this scenario, you pay $200, and the insurer pays $800. So that is co-payment of 20%.
Out-of-pocket payment maximum: This is a feature of your health insurance plan that limits or caps your annual payment or expense towards your health insurance’s deductible and co-payment. This is an important feature to examine. Why? Here is a scenario- you are taken ill and must undergo surgery which costs $100,000, and your plan has a deductible of $1000 and a co-payment of 20%.
You had already paid your deductible, so you are liable to pay 20% of the bill as co-payment which is $20,000! Luckily, your plan has an out of pocket maximum of $5,000. Assume you have already spent $1000 towards the deductible and an additional co-payment of $500 till this point, you are only liable to pay $5000 minus the total that you have spent so far ($1500). The money that you need to pay adds up to $3500.
We hope this is helpful. Please comment on this post to let us know which other terms you want more clarity on and we will help you out!
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