What is an insurance premium?

At first glance, picking the cheapest health insurance plan might sound like a good idea. But to really get the most for your money, it’s worth seeing how the cost of your plan, or premium, comes together.

An insurance premium is the amount you pay to stay insured. Think of it like a subscription fee for your health plan. And like a subscription fee, your premium gives you access to health services when you need them.

Many people pay their premium monthly. The cost won’t change from month to month, but it can change from one year to the next, or whenever a plan renews.

How are insurance premiums calculated?

Premium costs can vary a lot depending on your circumstances. So when you shop for a plan, you may need to request a quote to get a price.

Insurance companies can’t base your premium on things like gender or medical history. By law, only 5 factors can affect the cost:

• Age — Care needs often change as you age. Premiums may rise to help insurance companies cover the amount of care you could need.
• Where you live — Location can affect the cost of medical care, the level of competition among insurers, and the state and local rules that apply to insurance plans.
• Tobacco use — Smoking is a risk factor in many chronic conditions. If you’re a smoker, you can expect to pay up to 50% more for your premium.
• The number of people on your plan — If you have a spouse or children on your plan, your premium will cost more. This is to account for how much care a family may need, versus one person.
• Plan type — In health care, there are 4 basic plan levels, or tiers, of benefits and premiums to choose from: bronze, silver, gold, and platinum.
  • These tiers show how you and the plan split costs for care, like copays or coinsurance. If you pay a higher premium, your insurance company will cover more of the cost for your care. If you pay a lower premium, they’ll cover less.
  • Bronze plans have the lowest monthly premiums, then silver, then gold. Platinum plans have the highest premiums. The plan levels don’t affect the quality of care you get.

How premiums affect other health care costs

Premiums are an important part of setting your health care budget. They can also affect your other health care costs, and the overall value of your plan.

• Copay — This is a set fee you pay for certain services in your plan. For example, if your insurance has a $25 copay, that’s what you’ll pay at your appointment, such as an eye exam or a doctor visit.
  • The amount of your copay depends on the plan level you have. For example, bronze plans tend to have lower premiums, but higher copays. Higher tier plans have higher premiums and lower copays.
• Coinsurance — Coinsurance means you pay a percentage for some services your plan covers. For example, a 20% coinsurance on a $100 procedure means you’d pay $20 for it. A lower premium may mean your coinsurance percentages are higher.
• Deductible — Most plans have a deductible. This is the amount you pay before insurance begins to cover your costs. For example, if your deductible is $500, you’ll pay the full cost of things like surgery and prescriptions until you hit $500. After that, your insurance covers part of the cost. Then you’ll just owe a copay or coinsurance.
  • Preventive care is usually covered at no cost even if you haven’t met your deductible. This includes things like blood pressure checks, certain cancer screenings, and kids’ checkups.
• Out-of-pocket maximum — After you hit your deductible, you’ll keep paying copays or coinsurance until you hit your out-of-pocket maximum. Once you’ve reached this limit, you won’t need to pay any more for most covered services that year. This includes copays or coinsurance. Plans with higher premiums may have a lower out-of-pocket maximum.

How to choose the right premium

There are generally 2 options to consider when comparing premiums:

Higher premium, more coverage

Higher monthly fees may not sound great at first. But they can help save you money once you add in other health costs like deductibles and copays.

This may be the right option if:

• You expect to get a lot of care or prescriptions
• You have an ongoing condition that requires regular care
• You want more coverage for unexpected health needs

Lower premium, higher deductible

This option saves you money if you don’t end up needing as much care.

It could be the right option if:

• You’re generally healthy
• You don’t expect to need a lot of services
• You can budget or save for unexpected care costs separately

Premium vs. deductible

Remember: Your premium is what you pay each month for your plan. Your deductible is a fixed amount you pay for health care services before insurance covers most costs.

These two costs are closely related because the more you pay for one, the less you’re likely to pay for the other. That’s why plans with a lower deductible cost more each month. On the other hand, high deductible health plans have lower monthly premiums.

How does paying your insurance premium work?

If you get health insurance through your job, then your employer may pay a part of your premium. The rest usually comes out of your paycheck. This way you don’t have to remember to pay it.

You can also buy a plan directly from an insurance company. Or you can use a health benefit exchange or marketplace like HealthCare.gov. But remember: You’ll need to make payments every month or set up your own automatic payments.

What happens if you miss a premium payment?

If you miss a payment for your monthly premium, your insurance company can cancel your policy. Some may offer a grace period of 1 to 3 months, but your coverage could be limited during that time.

If your plan is canceled, you might have to wait to buy another one until the next open enrollment period, usually during the fall or winter. If your circumstances change, like getting married or losing your job, you can enroll sooner. This is considered a special enrollment period.

What if I need help paying my premium?

If you buy your plan from a health benefit exchange and meet the income guidelines, you might qualify for a premium tax credit from the IRS. You can use it for monthly payments or take it as a lump sum when you file your tax return. You’ll choose your preference when you enroll in the plan.

Need more help with your budget? Explore different ways to save on health care expenses.