While it might seem like calculating health insurance premiums is difficult for the layperson to understand, there are only a few relatable factors that affect them. Typically, insurance underwriters examine individual factors such as age, health history, and occupation to determine your premiums.
Knowing how health insurance premiums are calculated will help you make better health and insurance decisions. It’s critical to understand your health insurance plan ahead of time, so your policy doesn’t let you down when you’re struggling with health issues.
What are health insurance premiums?
In short, health insurance pays for a policyholder’s medical expenses in the event they get injured or fall ill. Depending on your insurance policy, the insurer will pay either the full medical costs or only a portion. Of course, your health insurance will only remain in effect if you keep paying the premiums.
Health insurance premiums are the monthly price you pay to keep your health insurance in effect. While there is some leniency, your insurance provider will eventually drop your plan if you stop paying for long enough.
How do insurance premiums work?
Naturally, you pay your insurance provider a monthly premium to maintain your insurance plan. If your employer provides you with health insurance, then you’ll pay for the premiums through payroll deductions. For the most part, health insurance premiums are not deductible. Although there are a few exceptions.
Furthermore, you must consider costs like deductibles and copays. The deductible is the amount of the medical bill that you must pay out of pocket before your insurance coverage kicks in. That means most health insurance plans won’t cover small expenses. Meanwhile, copays are a fixed amount that you must pay for doctor visits or pharmaceutical drugs, no matter the cost. Once again, your insurance will cover the remaining cost, but you will still need to pay for small drug expenses.
Finally, there is a variation of health insurance called coinsurance. In this scheme, you as the policyholder must pay a percentage of the medical bill even after reaching the deductible. The insurer will pay the rest. It might not seem advantageous, but this insurance scheme is cheaper.
Who will pay for my health insurance?
If your employer has a health insurance plan, then they will take care of the payment details. However, unless they offer you special benefits, you will still mostly pay for the insurance through monthly paycheck deductions.
Some employers offer group health insurance as an incentive to woo new employees. In general, pooling your insurance together with other employees will help lower everyone’s costs. Remember that depending on your health insurance plan, you will still need to pay for certain things like deductibles and copays. It’s hard to get a free ride with health insurance.
Factors that affect health insurance premiums
Actuaries and insurance underwriters account for a multitude of factors when they set your health insurance premiums. All these factors contribute to defining your individual risk of filing a claim. The more likely they perceive that you will file a claim, the more you must pay in insurance premiums to compensate.
With the introduction of the Affordable Care Act (ACA), insurers must not terminate your coverage if they discover a pre-existing condition. Furthermore, insurance companies can’t investigate your medical history and refuse to provide you coverage based on the risks they discover. Although, this could still lead to higher premiums for you.
Note that the only way an insurer can deny you coverage is if they deem that you have perpetrated insurance fraud. In that case, you have plenty of recourse to appeal.
Income
The more money you earn, the more you will pay. This is especially true in group insurance plans that are offered by your employer. That said, you will pay a lower percentage of your total income in premiums, so it’s not all bad news.
Age
Naturally, age is considered a major risk when calculating health insurance premiums. People typically see the biggest increases in their premiums after they turn 55.
Gender
While the ACA outlined that insurers cannot adjust the price of their premiums based directly on gender, there are still indirect effects. For instance, women are not affected as quickly as men by age-related premiums because they have a longer life expectancy.
Medical History
While you know insurers research your health history and account for past diseases and complications, they will also look at your family history. As a result, you can expect to pay more for health insurance if your family has a history of heart diseases, cancers, and diabetes.
Moreover, actuaries will also inspect your health insurance claim history and evaluate the claims you’ve made in the past. This will help them determine how likely it is that you will file a claim. You could be retroactively penalized for making a series of small claims that they feel are unnecessary.
Physical Condition
When it comes to your physical condition, several relevant aspects make you prone to diseases in the future. For instance, those with high BMI are considered more prone to heart conditions and other diseases. Meanwhile, smokers are considered high-risk for cancers, asthma, and heart disease. Both smokers and people with high BMI can expect to pay higher premiums for their health insurance coverage.
Occupation
Naturally, those with high-stress or dangerous jobs also pay higher health insurance premiums. High-stress jobs come with a risk of heart diseases and other complications while dangerous jobs could increase your likelihood of injury. Policemen and firemen are good examples of both high-stress and dangerous jobs.
Amount of Coverage
Finally, you can also reduce your health insurance premiums by adjusting the amount and type of coverage you receive. As we discussed earlier, the less coverage you receive, the cheaper it is for you. That’s why copay models, where you pay a percentage of medical costs, became popular. You could also reduce costs by opting for a higher deductible if you feel that you can take the hit.
How to lower health insurance costs?
1. Shop around
Since there are many different health insurance companies, you should always shop around for a better rate. Sometimes to get the best rate, you can talk to insurance agents and play them against each other to see if one will “outbid” the other. However, you shouldn’t be overly eager to take the cheapest deal. Check the insurance company’s creditworthiness with Standard & Poor’s so that you’re confident they will pay benefits if you have a claim.
2. Look for other payment options
As we mentioned earlier, copayment and other payment methods will ensure that you pay a lower price for insurance premiums. In exchange, you must split healthcare costs with your insurer.
Another useful strategy consists of top-up healthcare plans. This type of health insurance is extremely low-cost and basic. Luckily, you can top your premiums up if you feel you need to broaden your coverage
3. Buy early
Those who are younger will pay lower premiums from the start due to their lower risk level. Better yet, you could lock in a multi-year plan at an affordable price.
Final Thoughts
Health insurance is important to everyone. You don’t want to get caught out with any surprises when you go to file a claim. Once you understand how insurers calculate your premiums, you can make informed decisions regarding your health insurance and hopefully save some money.