Health Insurance: How to Understand What You Need

Nothing says you’ve arrived at adulthood quite like choosing health insurance for the first time. Do you need to choose a policy because you got your first job with benefits? Or is it time to hop off your parents' plan?

Whatever your reason or need, choosing the right healthcare coverage can get complicated.

First, you need to understand your situation. What kind of health concerns do you have now? Is there anything you need to make sure your plan covers? What’s your financial situation? Do you have a large emergency reserve that can handle a high deductible?

This guide will help you understand health insurance from top to bottom. We’ll explain what kinds of insurance are on the market and the difference in plan types. We'll also discuss how you can determine what kind of coverage you need and how to make the most of it.

The Questions to Ask and the Important Points to Understand About Health Insurance

Health insurance is different than other types of insurance products. The value of your property determines the amount of your auto or home insurance, for example. But health insurance isn’t based on the value of your health.

That means creating a custom plan that exactly covers what you need is just about impossible. When you want to know what you need, think about what coverage is enough.

Think about the following questions to determine what “enough” means for you:

How at risk are you?

In other words, how is your health? How likely are you to need medical attention on a regular basis? Try to determine your risk of ill health - if it's high, you need a plan that can help protect you. If it’s lower, you may not need as much coverage.

How much have you spent on healthcare in the past?

Know how often you go to the doctor and what you pay for each visit. What does it cost to get special attention (such as lab tests) and prescriptions? Once you have this number, you can use it to help check potential out-of-pocket costs on a new plan.

What’s your payment preference?

Some plans come with high deductibles which may sound scary. Paying $5,000 or more out of pocket would be a huge burden. But the tradeoff is that these plans may offer lower monthly premiums. That may make better financial sense for you if you don’t go to the doctor often and have an emergency fund that you can tap in case of, well, an emergency.

And, just to be clear, not carrying health insurance is not a good option. Under the Affordable Care Act, those who can afford insurance but choose not to buy it must pay a fee. That fee is the individual shared responsibility payment.

You’ll owe that fee for any month you or your dependents don’t carry insurance. Anything you owe is due when you file your federal tax return for that year. There are exceptions, but most people will need to maintain coverage or pay the fee.

The Types of Health Insurance Available (and Where to Find Them)

For the most part, look at major medical health insurance. These policies include major medical plans, qualified plans, and catastrophic plans. Other policies exist, like short-term insurance and “gap” insurance.

We'll focus on major medical for the purposes of this guide. There are many different types of this coverage:

• HMOs

HMO stands for Health Maintenance Organization. HMOs are usually cheaper than other plans and keep out-of-pocket costs low. You need to stay in your provider’s network and going to specialists requires a referral from your primary care doctor.

• PPOs

Preferred Provider Organizations allow you to go outside of your network to receive care. You don't have to get a referral before you see someone other than your primary care provider. But you’ll likely pay a little more (and in-network servicers are cheaper than going out-of-network).

• EPOs

EPO stands for Exclusive Provider Organization. This is a bit of a mix between an HMO and a PPO. You need to stay in network for care, but specialists don’t require a referral.

• POSs

This is a Point of Service plan. You can go outside the network, but you need a referral to do so.

Requiring a referral before you can see specialists isn’t always a bad thing. It means less work for you because you won’t have to choose a specialist yourself. Your primary care doctor coordinates with other healthcare professionals for you.

In most cases, HMOs are the cheaper options. But you have less choice when it comes to choosing doctors and specialists. PPOs come with a higher cost, but the tradeoff is that you receive more options.

These health insurance plans will come from one of these sources:

• Your Employer

If you’re employed and your company offers benefits, take advantage! Your employer helps cover the cost of the insurance, and your portion of the bill is paid for with pre-tax dollars out of your paycheck. This is a big benefit over purchasing your own insurance - you have to pay for that with post-tax dollars.

• Private Marketplaces

Shop for a plan from a private health insurance marketplace. This is best if you're not employed or self-employed. eHealthInsurance is one of these marketplaces that is registered and licensed to sell insurance in all 50 states and in D.C. You can also work with an individual broker to buy insurance.

• State and Federal Marketplaces

Some states have their own marketplaces. If yours does, you can go through their portal to look for coverage. Residents in states without local marketplaces can go through the federal marketplace Healthcare.gov. (You can also use the Healthcare.gov website to help you locate a state marketplace.)

The source of your insurance may impact the type of policy you can receive. If you’re employed, you don’t have to purchase a plan through your employer. You can shop for your own through a marketplace or check out subsidized plans from the government.

But again, opting out of your employer’s offered plan may end up costing you more money. Make sure there’s a legitimate reason before turning down what’s available from your employer.

This is why it’s also important to weigh decisions like quitting your job or becoming self-employed. Your employment status can impact what kind of health insurance you can receive. It also impacts how much that insurance costs.

It’s always wise to educate yourself before making a choice. Feel free to compare plans from various sources before you make a decision.

Determine How Much Coverage You Need

It’s important to determine how much insurance you need. Let's say you're a healthy person who doesn’t go to the doctor often besides for annual checkups. There's no reason for you to pay for a pricey plan that offers more bells and whistles than you’ll use.

By doing so, you're helping to subsidize the unhealthy people your insurance provider services! It’s okay to get a plan with the least amount of coverage. But you need to be honest with yourself about your current health and future health concerns.

If you’re young and healthy, you can choose a plan that offers low monthly payments and basic coverage. This will keep your ongoing costs down. But be aware that lower premiums usually mean higher out-of-pocket cost.

But that’s okay. If you're healthy enough to chooose a lower premium, you can save your money and build an emergency fund to cover you in case something does happen.

Not sure what level of insurance you need? You should consider more coverage if you can check any of the following boxes:

• You visit the doctor on a regular basis or frequently require medical and/or emergency care
• You take expensive medications
• You have small children or plan to get pregnant soon
• You have a chronic illness or medical condition

Getting a plan with more coverage and lower out-of-pocket costs will help you handle your medical expenses. Your monthly payments will be higher.

But that will likely be worth it if you rely on your insurance to help cover even larger medical expenses. These can include hospital bills, care needed for chronic illnesses, and emergencies.

Don't Forget - Some Plans Come with Added Perks

One last thing to look for when it comes to determining how much health insurance you need is added benefits like FSAs and HSAs. These are special savings accounts that allow you to maximize the money you use for healthcare.

FSAs, or flex spending accounts, come through your employer. You can use an FSA to save up to $2,500 for medical expenses. This money is pre-tax, which means this isn’t counted in your taxable income.

The medical expenses you can cover with FSA funds include doctor bills and prescriptions. Even things like childcare costs can qualify.

The only catch with an FSA? You can only get it through an employer, and the funds you save in the account must be used by the end of the year - or you lose them. They do not roll over, so you need to budget your savings carefully and don’t contribute more than you plan to use.

HSAs, or hHealth savings accounts, are another type of special savings account designed to help you pay for medical costs. These accounts are only available if you have a high-deductible health insurance plan.

The cool thing about HSAs is that the money you contribute is pre-tax - and if you spend the money on a qualified medical expense, that money is also free from being taxed. Plus, your money can roll over indefinitely. You don’t need to spend it in the same year you contribute it to the account.

FSAs and HSAs can be great perks in addition to a health insurance plan. If a plan you consider offers access to one of these accounts, take that into consideration when you determine what you need

Just be aware you cannot contribute to both an FSA and an HSA at the same time. You’ll need to choose the account that works best for you.

The Bottom Line for Health Insurance Coverage

Ultimately, the health insurance you need comes down to your individual situation - and that includes the state of your health and your risk for health changes or complications in the future.

Lots of coverage isn’t always necessary, so skip it if you won’t use it. But if you need more insurance, don’t skimp! Healthcare is expensive and proper coverage will help you cover the cost.