Mastering the Insurance Maze:
How to Choose a Health-Insurance Plan

Punting my office job for the freedom of freelance copywriting was the best decision I ever made. However, one scary aspect of that leap was leaving behind the health insurance my employer provided.

It turns out you CAN get good coverage at a reasonable cost. In fact, our family will save over $3,000 per year with our new individual plan.

This week, I'll talk about the best way to find coverage that's right for you. Next week, I'll tell you how you can take advantage of new laws that make your insurance premiums 100% tax-deductible.

Prepare for the Initial Sticker Shock

When you participate in a group policy, your health-insurance premiums are usually relatively low because:

  1. You share expenses with your employer.
  2. Premium costs are based on risk. Insurance companies spread the cost of your health risks over a large – and relatively healthy – group.

However, with individual coverage, you'll face much higher premiums. Nevertheless, you SHOULD pay for coverage. It's too risky to go without.

Keep two things in mind: One, it's easier to roll into an individual insurance plan if you're currently enrolled in an existing one. Two, there's almost no safety net in this country for those who cannot get insurance coverage. Most companies won't cover pre-existing conditions. Trying to get coverage after you get sick is either expensive or not possible.

Some good news …

  • Since last year, insurance premiums for the self-employed are 100% tax deductible. That means you pay less in monthly premiums.
  • Health Savings Accounts allow you to use pre-tax dollars to pay for deductibles and other medical-related expenses. (More on these next week).

Keep in Mind As You Shop for a Policy

  • There's no direct relationship between cost and quality. Spending a lot on premiums doesn't ensure you're buying a good policy.
  • Costs and coverage options vary widely among plans and insurers. So shop around. Do not buy the first policy you come upon. Talk to more than one agent (they aren't objective, remember) to make sure you're giving yourself some real choices.
  • The insurance industry is regulated at the state level. Each state has different rules on the types of coverage insurance companies must provide. Your insurance needs and available choices are unique, so do the legwork to find the right fit.

Consider a Zero Co-Pay Plan

Your total expenses for health insurance fall into three main categories: monthly premium, size of the deductible, and percentage of co-pay per visit.

The monthly premium is how much you pay every month to maintain coverage.

The deductible is how much you pay out-of-pocket for medical expenses before coverage kicks in.

The co-pay is either a fixed amount or a percentage of the cost of a medical procedure or office visit that you have to pay every time.

Traditional group plans usually have a relatively low deductible and a small co-pay. Your co-pay might be 10% or 20% of the total medical costs. The insurance picks up the rest.

While these types of policies are available in individual policies as well, a better choice is a plan with a much higher deductible and a zero co-pay. These are sometimes referred to as "catastrophic" plans.

You pay a much lower premium in return for the higher deductible. If you're healthy, this can be a more economical approach. The zero co-pay also reduces your risk should you be gravely injured or become very ill.

A quick way to get a feel for the plans available – and the premiums involved – is to check www.ehealthinsurance.com.

After you give some basic information, the site lists policies available from providers that offer insurance in your particular state.

Guidelines for Choosing a Plan

Decide up front what you're willing to pay for insurance and how much coverage you can afford.

Here are some guidelines to consider as you shop around:

  • 1. The Network

    Most policies today offer a managed-care plan where you agree to use doctors within a network in return for lower premiums. Make sure the network you choose has adequate coverage in your area and that your favorite doctor or clinic participates in the plan.

    There are two major types of managed-care plans:

    • Preferred Provider Organization (PPO). Your out-of-pocket expenses are lower if you use doctors within the network, but you can still use non-network doctors.
    • Health Maintenance Organization (HMO). You're restricted to using only in-network doctors. In recent years, HMOs have fallen out of favor. However, they can offer very economical premiums if you are willing to live within their rules.
  • 2. Exclusions

    Some policies have "exclusions" – procedures and conditions that aren't covered. For example, some policies won't cover mental-health or substance-abuse treatments.

    Some policies set a cap on the amount of coverage for specific conditions. One company restricted treatment for back pain to $100,000 – a cap you can reach very quickly today.

  • 3. Lifetime Maximum

    Most policies set maximum amounts of coverage they provide – usually $1 million to $10 million. The more, the better. But a good rule of thumb is to eliminate policies with less than a $2 million maximum.

  • 4. Pre-Existing Conditions

    Most policies don't cover pre-existing conditions. If they do, they charge exorbitantly high premiums. If you have a serious pre-existing condition, group coverage provided by an employer might end up being the best (or only) way for you to go.

    When you talk to insurance agents, be up-front about your situation. It's better to understand the policies first than to risk having your claims denied later.

  • 5. Premium Increases

    Most individual policies base your premium on an analysis of your risk of getting sick or injured. (In other words, they are "underwritten.") Companies consider your age, gender, past medical history, and where you live. If you're in good health, take good care of yourself, and don't engage in risky activity, you'll likely qualify for the best rate.

    However, in some cases repeated or excessive claims can lead companies to "re-underwrite" your policy and increase your premium. When you talk to an agent, ask about their policy regarding re-underwriting.

  • 6. Dropped Coverage

    An insurance company cannot drop you once they've insured you if you get sick or make multiple claims. They can, however, drop everyone (if they go out of business or drop individual coverage).

    Make sure you pick a reputable company with a proven track record and financial stability. A.M. Best (www.ambest.com) rates the financial strength of insurance companies. Avoid companies that rate a B+ or lower.

  • 7. Maternity

    Almost no individual policies provide maternity coverage as part of the basic policy. Many have optional expensive maternity riders. It may be more cost-effective to skip the premiums and pay the cost of delivery directly. Most policies cover complications to the mother or baby that may arise during delivery.

  • 8. Discount Drug Cards

    Many policies now provide optional drug-discount cards. The premiums are high, and the discounts can be as low as 15%. Unless you have a great need for prescription drugs, the discount simply won't cover the costs of the premium.

Next week, I'll tell you about the new Health Savings Accounts created by Congress, which can provide significant savings.

[Ed. Note: AWAI graduate Patrick Stevens is a freelance writer and consultant. He has 12 years business experience as a corporate finance and marketing executive. Pat recently moved with his wife Jen to Colorado – “where we always wanted to live.” Pat and Jen work from home and take care of their 3-year-old and 5-month-old boys.]

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Published: December 6, 2004

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