Health insurance terms to know
When shopping for health insurance, terminology can be a barrier to understanding your options. By knowing the difference between a premium, deductible and other parts of coverage, you can choose a health insurance plan with confidence.
A premium is an amount you pay to your health insurance company each month to maintain your coverage. When trying to understand the cost of a health insurance plan, the premium is the first thing you’ll want to consider. But make sure to balance it against other costs, such as copayments, deductibles and coinsurance.
TIP: Choose a lower premium/higher deductible plan if you are relatively healthy and want to save money upfront. Choose a higher premium/lower deductible plan if you want lower costs when receiving medical services.
A copayment, or copay, is the amount you may be required to pay for a specific type of medical service. For example, your health insurance plan may require a $20 copayment for an office visit or prescription drug. After you pay this amount, your insurance company will pay the remaining amount.
TIP: If you make frequent doctors’ office visits, choose a plan with affordable and consistent copayments.
The annual deductible is the amount you may be required to pay out of pocket before your insurance company begins paying for your covered medical claims. Your monthly premiums and copayments will not count toward your deductible. Not all plans require a deductible, but choosing a plan with a higher deductible can keep your monthly premiums lower.
TIP: If possible, limit your deductible to no more than 5% of your gross annual income. If you’re an employer, keep this in mind for your employees too.
Coinsurance is the amount you may be obligated to pay for covered medical services after you’ve satisfied any copayment or deductible required by your health insurance plan.
Here’s an example: Your insurance company may limit coverage for certain services to 80%. If you receive an X-ray and your insurance benefit covers 80% of the cost, you will need to pay the remaining 20% even if your annual deductible is already met. That 20% is considered coinsurance.
Maximum Out-of-Pocket Cost
It’s important to know your maximum out-of-pocket cost when considering a new health plan. This amount sets a limit on your annual financial liability. Once you have paid out-of-pocket to the maximum amount – typically through deductibles, copayments or coinsurance – your insurance company will pay for any additional covered medical services that year. Your monthly premium will not count toward your maximum out-of-pocket costs.
If you’re looking to learn more about health insurance, view our health insurance guide for individuals and families.