What Is Health Insurance?

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 of being 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 trying to pick the best streaming service to watch on a Saturday night (only not nearly as fun), there are only two main types of health insurance: private and public.

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) and 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 cover 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. And for things like regular doctor visits, you’ll usually just have to pay a small copay (typically 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.

Your health insurance needs may change as you go through different life stages, and that’s totally normal. Insurance isn’t one-size-fits-all. That’s why there’s a set time each year, called open enrollment, when you can review and adjust your plan to fit your current needs.

But life doesn’t always stick to a calendar. If something major happens outside of open enrollment—like having a baby, getting married, or losing your job—you may still be able to update your coverage through a special enrollment period. You’ll just need to report a qualifying event to your insurance provider, and once it’s approved, boom—you’re covered.

What Is Individual Health Insurance?

Individual health insurance just means it’s a plan you buy on your own—individually. 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 those employed by a particular company.

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. The cost of health insurance premiums can sometimes feel like you accidentally signed up for the fancy Diamond plan instead of the basic Silver one—it’s pricey! 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.

Why Is Health Care So Expensive?

Going to the emergency room is bad enough—but getting slammed with the bill after? Total insult to injury. Here’s the deal: Paying big bucks for health insurance each month stinks, but going without it isn’t an option. Bubble Wrap won’t protect you in a car crash, and your savings account shouldn’t vanish over one hospital visit.

So why is health care so expensive? A bunch of reasons. Government regulations, bloated admin costs and rising prescription prices all get passed down to—yep, us.

But don’t let the health care system take advantage of you. Look for ways to save, like shopping for a new provider, sticking to in-network care, or opting for a high-deductible plan. If you qualify, a Health Savings Account (HSA) is another smart move—it lets you save tax-free for medical expenses.

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 helping you. For example, if your deductible is $5,000, you’d have to pay $5,000 for care yourself. Only after that would your insurer start pitching in 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, covering 100% of your health costs through the end 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.

Health Insurance Networks

Let’s break down two terms you’ll hear a lot: in-network and out-of-network.

A health insurance network is just a group of doctors, clinics or hospitals that have agreed to work with your insurance company—and charge discounted rates. So that $150 lab test might only cost you $90 if you stay in-network. Not bad, right?

But here’s the catch: Not every provider is in your network. That’s why it’s smart to check your plan’s list of approved doctors and facilities before you book an appointment.

Out-of-network means the provider didn’t make a deal with your insurer. And without that agreement, your insurance can’t control the cost. That usually means you’ll pay full price—or close to it. So, when in doubt, stay in-network and save yourself a financial headache.

How to File a Health Insurance Claim

Well, 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:

1. 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. 
2. 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. 
3. 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. With constant changes like new laws, inflation, virtual care and AI, the health industry isn’t exactly standing still. And when you factor in deductibles, networks, copays and premiums, it can be tricky to make sure your plan actually matches your individual life circumstances.

To dig deeper and make sure you’ve got the right coverage, check out our FAQs and connect with our RamseyTrusted^® partner, Health Trust Financial. They’ve been serving Ramsey users for over 20 years. When you work with Health Trust Financial, they’ll walk you through the best health insurance quotes and policies for your situation and explain all the insurance jargon to you. Best of all? They'll never try to sell you something you don’t need.

Connect with Health Trust Financial today!