Trying to figure out health insurance can sometimes feel like trying to learn a new language—but without the snazzy language-learning apps.
But don’t sweat it. If you’re wondering, What is health insurance?, we’ll unpack all those fancy, confusing terms and explain it in plain English. So you can make sure you get the coverage you need to stay healthy and keep your finances in shape.
What Is Health Insurance?
Health insurance is a type of insurance coverage that helps pay for the often-expensive costs of medical care—hospital visits, surgeries, emergency room stays, regular checkups, prescription drugs, all kinds of things. Sometimes called medical insurance, health insurance’s main job is to transfer risk from you to the insurance carrier (nice!). This way you don’t end up drowning in medical bills you can’t afford. In fact, the financial risk you take on without health insurance is one of the biggest reasons everyone needs it.
While the number of health insurance options out there might remind you of Saturday night trying to pick the best streaming service to watch (only not nearly as fun), there are only two main types of health insurance: private and public.
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Private coverage is what’s offered by your employer or union. It also includes plans on the government-run marketplace (Healthcare.gov) during open enrollment.
Public health insurance is the kind paid for by Uncle Sam. It includes Medicare for people over 65 years old, Medicaid (for low-income families) or coverage from the Department of Veterans Affairs.
How Health Insurance Works
Now that we’ve answered a little about what health insurance is, let’s see how it works.
In practice, health insurance can be pretty complicated (“Wait, I thought you said this surgery was covered!”). But in theory, it’s pretty straightforward.
By paying a monthly premium, your health insurance company will a portion of certain health-related services—as long as they’re included in your plan. Once you pay a certain amount out of pocket, called the deductible, the insurance company will start chipping in on your medical bills. Your insurer will then cover some of those costs. And for things like regular doctor visits, you’ll usually just have to pay a small copay (usually around $20), and your insurer will cover the rest—even if you haven’t met your deductible yet.
Many health insurance plans also have requirements about which network of doctors or providers you can use. You can work with whoever you want, but if that provider isn’t included in the right network, you won’t get the full benefit of your insurer pitching in.
One tip if you want to pay fewer out-of-pocket expenses: Lower your deductible. You’ll pay a higher monthly premium, but your insurance will kick in sooner. This also works in reverse. If you want to pay less every month, choosing a higher-deductible plan will lower your premium. It’s like a seesaw, but without the part where you get hurt because your friend jumps off.
What Is Individual Health Insurance?
Individual health insurance just means it’s a plan you buy on your own—individually (we told you some of this was not that complicated). The most common types of individual plans are the ones available on the marketplace as opposed to plans you get through an employer or government program.
What Is Group Health Insurance?
Group health insurance plans apply to a specific group of people, like ones offered by an employer.
Just like you might buy paper towels, granola bars or gummy bears (you do you!) at your favorite bulk store, many companies do the same thing for health insurance. Buying a plan for a group of people—in this case, employees—saves them money and can sometimes help you save.
But don’t assume your employer’s plan is your best option. Sometimes you can find cheaper options with the same coverage by shopping around a little.
And if you’re self-employed or unemployed, don’t worry. You still have some great options when it comes to health insurance.
What Is a Health Insurance Premium?
A health insurance premium is the amount you pay monthly (sometimes annually) for coverage. And the cost of health insurance premiums can sometimes feel like you’re on the Diamond plan, not Silver. It’s expensive! But what’s really expensive is not having insurance and staring at a $50,000 hospital bill.
Again, if you’re looking to pay less per month, pick a plan with a higher deductible. Just be ready to pay more out of pocket for medical expenses before your insurer starts helping. That shouldn’t be a problem for you if you follow our Baby Steps and have a fully funded emergency fund. You could also open a Health Savings Account (HSA) if your plan meets certain requirements—it’s a tax-free way to save and pay for medical costs.
What Is a Health Insurance Deductible?
You probably figured this out by now, but a health insurance deductible is the amount you have to fork over before your insurer starts reimbursing you. For example, if your deductible is $5,000, you would to pay $5,000 for care yourself. Only after that would your insurer start reimbursing you for expenses.
You might have also heard of something called maximum out-of-pocket costs. This is the maximum amount—the ceiling—you will pay for care in a given year. So when Murphy strikes, and it feels like the sky is falling, there is at least some kind of limit. After you hit that, your insurer will take it from there, at least through December 31 of that year.
What Is Coinsurance?
Coinsurance is related to your maximum out-of-pocket costs and also affects your premium. It’s the percentage of medical services you’re responsible for covering once you’ve hit your deductible. It’s a way to split the costs of health care with your insurance carrier.
On most policies, coinsurance is usually a fraction—like 80/20 or 70/30. So if your plan says 80/20, your insurer will handle 80% of the costs, and you’ll take care of the other 20%—but only after you’ve hit your deductible for the year.
How to File a Health Insurance Claim
So you’ve hit your deductible, and you’re ready to file your first claim (hopefully it’s not for something too serious).
The first thing to understand is that, most times, you won’t even have to mess with the claim. Your doctor or provider has your insurance information and will usually send the claim directly to your insurer.
But if you do end up filing the claim yourself—like if you’re in an accident while traveling—here are some tips:
- Find the claim form on your health insurance carrier’s website. If you can file it online, even better. If you have to go old-school and print it, you’ll need to fill out information like your policy number, name, and explanation of the injury or care.
- Make sure to get an itemized bill from your provider. It should include every aspect of the care you got. The last thing you want is for your claim to be denied on a paperwork glitch.
- Create a thorough paper trail. Make a copy of all paperwork you receive related to the incident. Keep a folder or screenshots on your phone and stay as organized as possible. You never know what you might need in the future.
Once you do this, go ahead and follow the directions from your insurance company to file the claim. Then it’s just a matter of waiting for your insurer to approve or deny it. If they do deny it, you can always appeal.
Get Someone in Your Corner
Now you know the basics of health insurance. But there’s still a ton more we didn’t get into. And with deductibles, networks, copays and premiums, it can be pretty complicated to make sure your health insurance plan actually matches your individual life circumstances.
This is why we recommend working with an independent health insurance agent who is part of our Endorsed Local Providers (ELP) program. They’ll bring their unique knowledge of the industry to get you the best coverage at the best price. And they’re RamseyTrusted, so you know you’ll be working with agents who have the heart of a teacher and can actually explain what the heck you’re paying for.