3 Health Insurance Rules You Should Know by Heart

By Markets Fool.com

Unexpected healthcare costs can drive even financially comfortable families into bankruptcy. As a result, it's essential for people to get the health insurance coverage they need to protect against that level of risk. However, many find health insurance extremely confusing, and they can make poor choices because of their lack of knowledge. Below, we'll look at a few basic rules to follow in looking for the best health insurance coverage for you and your family.

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Rule 1: Look beyond premium charges to incorporate all the costs of health insurance.

It's tempting to pick a health insurance policy solely based on paying as little as possible in monthly premiums. The monthly cost of a particular type of health insurance can sometimes be the easiest part of the insurance world to understand, but by itself, your premium cost is only half of what you need to know about a health insurance policy. You also need to consider what coverage the policy offers.

As an extreme example, say one health insurance policy cost $250 per month but didn't pay anything until you had incurred $1,000 in healthcare costs during the year. After that, it paid 50% of the costs, leaving you to cover the other half. Now compare that with another policy that cost $300 per month but provided immediate coverage with no deductible and covered 80% of your eligible expenses. If you have no healthcare costs whatsoever during the year, then the cheaper policy would save you $100 per month. However, if you spend just $62.50 per month on eligible healthcare costs, then the policies pay equal amounts, and above that, the more expensive policy ends up ahead. Don't just buy the cheapest policy before looking at your needs and what the policy covers.

Rule 2: Take government and employer subsidies into account in choosing health insurance coverage.

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Most people don't pay the full cost of their insurance. Whether your employer pays part of the costs or whether you qualify for government subsidies under the Affordable Care Act, the subsidies that you're eligible to receive can sometimes change what would otherwise be a smart decision if you were responsible for all of your health insurance costs.

For instance, the Affordable Care Act offers two kinds of subsidies to those who buy health insurance through its marketplaces. The one that most people are familiar with pays a portion of premium costs. However, another often-neglected subsidy pays a portion of the out-of-pocket costs that most insurance policies charge through deductibles and co-payments. This second subsidy can save you thousands of dollars.

However, what many people don't know is that to get the cost-sharing subsidy, you have to buy at least a "silver" plan under Obamacare; "bronze" plans don't offer the subsidy. Therefore, if you would qualify for subsidies under the Affordable Care Act, take the time to do your research. You'll typically find that a silver plan is the better choice regardless of paying a higher cost.

Rule 3: Consider high-deductible health plans and health savings accounts.

Above, we considered a situation where buying a policy with the highest available deductible was a bad move. However, those who have extensive financial resources will often get a better deal by using high-deductible health plans (HDHPs) combined with health savings accounts (HSAs). HDHPs require deductibles of at least $1,300 for individual coverage or $2,600 for family coverage. The largest permissible out-of-pocket maximum is $6,550 for individuals or $13,100 for families.

If you have a qualifying HDHP, then you can contribute up to $3,350 toward a health savings account for individual coverage, or $6,750 for family coverage. Those contributions are tax-deductible, and they become tax-free if you use the money for healthcare expenses. Penalties apply if you need the money for other purposes, but an HSA can be a great way to bolster your savings and reap valuable tax breaks along the way.

Getting the healthcare you need is vital, and good insurance coverage makes it a lot easier. By knowing these simple rules by heart, you'll be in a better position to manage your own healthcare effectively.

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