I recommend our article on health insurance basics before this article.
As discussed previously, insurance is recommended when the probability of loss is low but the size of the loss is high (and health insurance is now mandatory by law!). For young adults, the probability of having significant health costs any given year are fairly low, but those costs could bankrupt you. Unfortunately, if you don’t choose your insurance plan correctly, you can still end up with significant financial hardship.
In general, plans with higher premiums will have lower deductibles and plans with higher deductibles will have lower premiums. For that reason, health insurance plans can be subdivided into two groups -
High premium / low deductible
Low premium / high deductible
Which plan you choose will depend on your risk retention limit. Your risk retention limit is the dollar amount that you are okay losing. This will depend on your savings (aka wealth) and your psychological perspective on loss. My risk retention limit is $800. I will not insure anything that will cost me under $800 to replace. Although I don’t want to drop $800 on anything, I am psychologically and financially prepared to. Your deductible should be equal to your risk retention limit.
This article is basically a warning against low premium/high deductible plans unless you have the savings to afford it. Financially speaking, low premium / high deductible plans are the best financial option, again IF YOU CAN AFFORD THEM because they require you to only spend money if you need it (examples below). Remember when you are choosing a plan that the reason you are getting an insurance plan is because there’s a low probability but high cost to needing medical care. If you choose a plan with a deductible that you can not afford, it probably won’t matter, but if it does matter - it could cause your significant financial hardship.
For example, let’s compare two health insurance plans.
- Plan A has a 1500 premium ($125/month) , $500 deductible, and $5,000 max out of pocket; assume 15% co-insurance on all services.
- Plan B has a $500 premium ($41.67/month), $1500 deductible, and %5,000 max out of pocket; assume 15% co-insurance on all services.
Let’s say you have $2500 in your savings account.
Scenario 1: You have no health costs all year (no doctors appointments, ER visits, lab tests)
Plan A total cost = $1500
pay-check deductions = $1500
out of pocket costs = $0
Plan B total cost = $500
pay-check deductions = $500
out of pocket costs: $0
In this scenario, you spend $1000 more with plan A and despite not receiving any health services.
Scenario 2: You get a sinus infection, go to the doctor, get a couple of blood tests performed, and a prescription for antibiotics totaling $350.
Plan A total cost = $1850
pay-check deductions = $1500
out of pocket costs = $350 (because insurance doesn't kick in into your meet your deductible)
Plan B total cost = $850
pay-check deductions = $500
out of pocket costs = $350
In this scenario, you also spend $1000 more on plan A for the same health services with the same out of pocket expenses!
Scenario 3: You break your ankle playing basketball requiring an ER visit, Xrays, MRI, and orthopedic surgery totaling $10,000 in health care expenses.
Plan A total cost = $3,425
pay-check deductions: $1500
out of pocket costs = 1,925
deductible: $500
co-insurance = 15% * (10,000 - 500) = $1,425
Plan B total cost = $3,275
pay-check deductions: $500
out of pocket costs = 2,775
deductible: $1500
co-insurance = 15% * (10000 - 1500) = 1,275
In this scenario, you spend $150 more on Plan A for the same services, but your out of pocket costs with plan A are $850 less with Plan A. If you only have $2500 in your savings account, plan A will make a big dip in your savings, but you can afford it. You can not afford Plan B.
As you can see from the examples, no matter how low your premium or deductible, you will still be required to pay for a percentage of your healthcare costs out of pocket (and this percentage can be a significant amount of money depending on your healthcare needs). Also, the higher deductible plans typically result in the lower total cost for health insurance but the highest out of pocket costs. Since you can't predict your health care needs for any given year ahead of time (hence the need for insurance), it is important to have the total of your deductible plus extra for out of expenses in your savings account. You can read my advice for saving for big purchases and emergencies here.
