Understanding Health Insurance Premiums

FT Contributor
A stethoscope and eyeglasses sit on top on a health insurance document.
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A health insurance premium is a monthly payment that an insured individual makes to continue being insured. The premium you pay on your health insurance varies from one plan to another, but there is usually a correlation between the premium and the scope of coverage.

Your employer may cover part or all of your monthly health insurance premium. If you don’t receive insurance from an employer, you may be provided plan opportunities with different premiums via the Marketplace.

Below, you’ll gain a better understanding of how health insurance premiums are calculated and what you can do to reduce the overall costs of your healthcare.

What Is the Average Monthly Cost for Health Insurance Premiums?

The Affordable Care Act and the Health Insurance Marketplace create the opportunity for a variety of health care costs and premiums. Using healthcare.gov, most people are able to apply for and enroll in health insurance. On average, in 2018 the premium for individual coverage was $440 per month while the premium for family plans averaged $1,168 per month.

EHealthInsurance.com reports that the average monthly healthcare premium as determined by age is:

  • $231 for people under age 18.
  • $257 for people ages 18-24.
  • $312 for people ages 25-34.
  • $395 for people ages 35-44.
  • $541 for people ages 45-54.
  • $790 for people ages 55-64.

According to the Health Affairs Journal, these rates are expected to increase 5.6% each year until 2025.

How Are Monthly Health Insurance Premiums Calculated?

The average monthly costs of premiums are calculated using five criteria. It’s important to note that some states may limit how much these factors affect premiums, but all Marketplace health plans must provide the same essential health benefits.

  • Age: A premium can only cost three times more than the least expensive premium based on a person’s age.
  • Location: The price of your premium will vary based on your geographic location, as each state has a different market.
  • Tobacco use: Tobacco users are charged higher premiums, but they can only be 1.5 times more than non-tobacco users.
  • Individual or family enrollment: The number of people covered on a health insurance plan will contribute to the total cost of your premium.
  • Plan category: Plan categories fall under Bronze, Silver, Gold, Platinum, and Catastrophic and are based on how you share the costs of the plan. According to HealthCare.gov, “Bronze plans usually have lower monthly premiums and higher out-of-pocket costs when you get care. Platinum plans usually have the highest premiums and lowest out-of-pocket costs.”

Health Insurance Tiers

Individual and family medical plans require you to pay the full premium that your health insurance company charges on a monthly basis. In some cases, your employer or the federal financial assistance program may cover a portion of your premium cost, depending on the type of plan and who is covered.

Health insurance providers use tiered coverage based on five categories:

  • Bronze: This offers the lowest monthly premium, but a high cost when you need medical care. Annual deductibles can be thousands of dollars a year, depending on who is covered.
  • Silver: The monthly premium is moderate, as are the costs of care when you need it. Deductibles are typically lower than those found in Bronze plans.
  • Gold: High monthly premiums, but low costs when it comes to paying for care. Deductibles are usually low as well.
  • Platinum: This plan has the highest monthly premiums, but the lowest costs when you receive care. Deductibles are also very low.
  • Catastrophic: This plan usually has low monthly premiums, but you’re ineligible for the premium tax credit. Deductibles are extremely high — in 2020, the deductible for Catastrophic plans is $8,150.

With such a range of choices between the tiers, it’s important to choose a plan that will fit your medical needs and your budget.

Low-Cost Health Insurance

Paying a lower premium will result in higher deductibles and copays. Before you commit to health insurance with low premiums, consider the following when comparing health plans:

  • If you purchase a low-cost health insurance plan, you may have to pay a penalty on your taxes. Consider this added cost when shopping around.
  • Regardless of the plan you choose, you’ll always have to pay a premium. If you’re in good health, you’re still paying a premium regardless of whether you use your health insurance or not. How frequently you plan to use your health insurance should be a strong determining factor in the plan you enroll in.
  • Some health insurance plans limit your network. This means you can’t go to any healthcare provider you want to, only those “in your network.” If you do visit a doctor out of network, there are additional costs you must pay out of pocket.
  • Compare the premiums with out-of-pocket costs. Typically the higher the premium, the lower your out-of-pocket expenses are.
  • Know when to buy. If you qualify for a government subsidy, it’s imperative that you buy within a specific, small window of time. The Open Enrollment Period for 2019 ran from November 1 to December 15.

How to Reduce Health Care Premiums

Depending on your modified gross adjusted income and family size, you may be eligible for cost-sharing reductions. Note that cost-share reductions are only available to those enrolled in a Silver plan. These cost-sharing reductions may lower out-of-pocket costs, deductibles, and co-payments. Additionally, your coinsurance costs, or your share of coverage, may be reduced.

Advanced Premium Tax Credits

Premium tax credits are calculated using the federal poverty level, which is based on your annual income and family size. Those eligible for the premium tax credit may choose to use the credit to lower monthly health insurance premiums.

What if You Miss a Monthly Premium Payment?

If a monthly premium payment is missed, you run the risk of your healthcare coverage being canceled. There is a grace period of 1-3 months, but this is only applicable if you have a Marketplace plan, qualify for payments of the premium tax credit, and you’ve already made payments on a full month of premiums.

Medicaid As an Alternative to Private Health Insurance

Medicaid provides healthcare coverage to millions of Americans. Note that every state has its own rules about who qualifies for Medicaid under the ACA. The following factors determine eligibility for Medicaid:

  • Low-income families or individuals under the age of 65.
  • Qualified pregnant women and children.
  • Individuals receiving Supplemental Security Income (SSI).

If you meet these qualifications, you won’t need a Marketplace plan. Instead, you can get free or low-cost coverage from Medicaid.

Children’s Health Insurance Program

The Children’s Health Insurance Program (CHIP) provides health coverage to eligible children through Medicaid and CHIP programs. It is available to low-income families who earn too much to qualify for Medicaid. Children must be 19 years old or younger to qualify, and must meet the guidelines of their particular state.

Health insurance premiums can be confusing, but with the right information, you can make a smart choice as to the plan that’s right for you.

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