How does health insurance work?

The more you know about health insurance, the better informed you will be when it is time to choose a plan that is best suited for you.

At a high level, when you purchase health insurance, you, along with everyone else who has purchased the plan, have agreed to pay a fee in exchange for a variety of benefits. These benefits are the payments the plan makes to cover all or part of your medical expenses, such as visits to your healthcare provider, prescriptions, and hospital visits.

Each month, you pay a premium for your insurance. The amount you pay in premiums is determined by a variety of factors, including the services the insurance company will cover and how likely healthcare consumers are to need those services.

In addition to your premium, you may have to pay a deductible, co-pay, and/or coinsurance depending on your plan.

How Insurance Works

When you buy insurance you are buying access to day-to-day coverage that helps you get better deals on products and services, preventive services, as well as protection against serious medical issues and their expense.

Every time you visit the doctor, have a medical test or have to go to the emergency room, your insurance is working for you.

Let’s assume you have a plan with a $5,000 deductible, $6,000 out-of-pocket maximum and 20% co-insurance (each plan will be different) and let’s assume you need to have surgery with an allowed cost of $35,000.

Here’s how your costs would break out:

  • You pay the first $5,000 (that’s your deductible)
  • You would pay 20% of the remaining $30,000 however, your maximum out-of-pocket is $6,000, so you would pay only the additional $1,000 to reach your $6,000 cap.
  • Your insurance pays $29,000.

Remember, your deductible and out-of-pocket limit is for a year, so you won’t pay anything for additional covered medical services that year, but the deductible and out-of-pocket limit resets the following year.

Click on the video below for a further explanation of how health insurance works.