What’s the first thing that comes to mind when you hear the word premium? Do you think of high-grade gasoline for high-performance cars? Or first-class tickets for airline flights? Five-star restaurant meals?
The premium tag can be attached to all those things. But in the health insurance industry, premium has a much simpler meaning. Basically, it just means your monthly bill.
But as ordinary as that sounds, a lot goes in to determining how much that monthly bill is. We’ll explain all those factors so you can understand how each one affects your premium and how you can save money.
- What Is a Health Insurance Premium?
- How Are Health Insurance Premiums Calculated?
- How Do Deductibles Affect Health Insurance Premiums?
- How Do I Pay My Health Insurance Premium?
- How Can I Save Money on My Health Insurance Premium?
When shopping for your health insurance plan, keep in mind that the plan with the lowest premium might not be the best choice for your health care needs. We’ll explain why.
But first, let’s go over the factors insurance companies use to calculate your monthly premium amount.
Your health insurance premium is initially calculated using five main factors: age, location, tobacco use, the number of people on your policy and the plan category.1
This one’s easy. The older you are, the higher your premium. Health insurance companies know that as you age, you’ll need more medical care. And that increases the risk that they’ll be on the hook for paying higher medical costs on your behalf.
Where you live has a big impact on your premium amount because it affects things like competition with other insurance companies, state and local laws about coverage requirements, and cost of living.
Health insurance companies are aware that tobacco use can have a direct effect on the cost of your medical bills. To put it bluntly, tobacco users are out of luck here—insurers can charge tobacco users up to 50% more than those who don’t use tobacco.2
Number of People on Your Policy
The number of people on your health insurance plan plays a major role in how much you’re charged for your premium. If your health insurance plan also covers a spouse or dependent (in addition to you), insurers can charge more for your premium.
The health insurance industry uses “metal” categories to separate different types of health care plans: bronze, silver, gold, and platinum. (Catastrophic plans are also available from some people.)
Each category is based on how you and the plan share medical costs. For example, platinum plans usually have a higher premium and lower out-of-pocket costs.3 Out-of-pocket costs include deductibles, copays and coinsurance (we’ll get to that in a minute).
On the other end of plan categories, catastrophic plans (aka health insurance for healthy people) typically have the highest out-of-pocket costs and the lowest premiums, but they’re only available to people under 30 or people with income or hardship exemptions.4
Here are a few examples to show how all those variables go into calculating your premium. Assuming all other factors are the same in each scenario below, here are three examples of how premium amounts are calculated:
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Example #1: Let’s say you’re shopping for an insurance plan just for yourself. You’re 30 years old and in good health. The smartest health insurance plan for you will have high out-of-pocket costs and a low premium. That’s because you’re not likely to go to the doctor a lot, so you won’t have a ton of ongoing medical bills. Use the money you save on premiums to build up your savings to cover medical expenses when they crop up.
Example #2: You got married! Now you’re shopping for a health insurance plan for yourself and your spouse. You’re both in your early 30s and in good health. Again, the smartest plan for your situation will have high out-of-pocket costs and a lower premium. (Your premium will be somewhat higher than it was in example #1 because there are now two of you on the policy.)
Example #3: Now imagine you’re shopping for a health insurance plan for your entire immediate family (spouse and two children). One of your children (sadly) has cystic fibrosis and requires frequent trips to the doctor, requiring higher out-of-pocket costs. In this case, the plan with the lowest premium might not be the best fit for you. You’ll want a plan with a higher premium and low out-of-pocket costs.
It’s important for us to note that these examples are all based on plans you’ll find in the federal health insurance marketplace. States that run their own health insurance exchanges have their own pricing guidelines.
We recommend connecting with one of our Endorsed Local Providers (ELPs) who can get into the nitty-gritty of premium cost guidelines for health coverage in your area.
How Do Deductibles Affect Health Insurance Premiums?
Now is a good time to talk about health insurance deductibles, because like the five factors we just talked about, deductibles directly affect your premium amount. But unlike those five factors, you get to choose your deductible amount.
To choose the right deductible, it’s important to know how your deductible affects your premium. The easiest way to learn how they relate to each other is to remember that the higher your deductible, the lower your premium, and vice versa.
At this point you might be thinking, Why would I ever want a low deductible and a higher premium. That’s nuts!
While that might be true for healthy people, it doesn’t apply to everybody. Remember the cystic fibrosis example. A chronic illness like that could require monthly trips to the doctor, averaging $500–1000 per visit. And that adds up quickly.
But if you opt for a low deductible plan with a higher premium, you’ll only have to pay for the first few visits because your insurance company will start covering a chunk of your costs after you meet your low deductible.
You’ll pay a higher premium each month, but at the end of the year, you’ll have saved money by reaching your deductible sooner, which means more of those office visits will be covered by your insurance.
Now let’s talk about the logistics of making your monthly premium payment to keep your plan active.
You pay your health insurance premium based on where you purchased your plan.
If you bought your plan through the health insurance marketplace or a private insurer, you’ll pay your premium directly to the insurance company (either by check, digital payment or automatic withdrawal).
Make sure you continue to pay your monthly premiums to your health insurance company on time. If you don't, the insurance company could end your coverage.
If you bought your plan through your employer, a portion of your premium is usually paid for by your employer, and the premium balance is deducted from your paycheck—usually pretax, which means you’re not paying income taxes on the portion of your premium you pay.
Unless you make other arrangements with your employer’s plan administrator, you won’t have to remember to make your premium payment because it will be automatically deducted from your paycheck.
Ready for some good news? There are some simple ways you can save money on your premium.
Apply for a Tax Credit
One of the easiest ways to save money on your health insurance premium if you’re not getting it through your employer is by using a federal tax credit that’s based on your income estimate. When you apply for insurance through the federal marketplace, you’ll be asked your (net) annual income amount. Depending on your answer, you could be eligible for a tax credit to lower your premium.5
Choose an HMO
Another easy way to avoid a high premium is to choose an HMO plan instead of a PPO plan. HMO stands for health maintenance organization and PPO stands for preferred provider organization.
Typically, HMO plans are cheaper than PPO plans because you’re required to use doctors who are part of the insurance company’s network of providers. The only downside is that HMO plans can be less flexible than PPOs.
Choose a High Deductible
The way deductibles affect your premium is important enough to repeat here: The higher your plan’s deductible, the lower your premium.
For 2021 and 2022, the IRS defines high-deductible health plans (HDHP) as at least $1,400 for individuals and $2,800 for families.6
Saving money on your premium is easy here. All you need to do is choose a plan with a deductible that’s high enough to satisfy the IRS’s requirements.
If you choose a high-deductible health insurance plan, you have a great opportunity to open a Health Savings Account (HSA) where you can save money (tax-free) for potential medical expenses.
Choose a Lower Coinsurance Percentage
Coinsurance percentages offer another way to save. Coinsurance is the percentage of health care costs you’re responsible for paying after you’ve hit your deductible for the year.
When you look at your policy, you’ll see your coinsurance shown as a fraction—something like 80/20 or 70/30. The standard coinsurance amount is 80/20, which means you’re responsible for 20% of your medical expenses, and your health insurance will handle the remaining 80% once you’ve met your deductible.
The important thing to remember here is that your coinsurance ratio directly affects your premium amount: The higher your coinsurance percentage, the lower your premium. So, if your coinsurance is 60/40, your premium payment will be lower than it would be if your coinsurance was 80/20.
Choose Higher Copayments
You can also keep your premium cost low by choosing a plan with a higher copayment. Copayments are the fixed amounts you pay at the time of your doctor visit. In general, plans with higher copayments have lower premiums than plans with lower copayments.
Find the Right Health Insurance Premium for You
Because there are so many variables that can contribute to health insurance premium amounts, you need a pro to help guide you through the maze.
We covered the basics in this article, but to get more comprehensive advice from an expert, we recommend contacting one of our Endorsed Local Providers (ELPs). We recommend these providers because they share the financial values we teach and provide exceptional customer service.