What is Health Insurance and Do I Need It?

Having health insurance can help protect you from both health and financial risks. No matter how young or healthy you are, a serious injury or hospital stay could set you back thousands of dollars. That's money you could otherwise put towards retirement, buying a home, saving for college, or even use to save for a wedding or dream vacation. That's why it's important to consider health insurance as part of your overall financial plan.

Ahead, we'll cover key topics including:

• What is health insurance and how does it work?
• What health insurance covers
• How to get health insurance
• Do I need health insurance?
• And more

Health insurance is a type of insurance coverage that helps you pay for covered medical expenses (like illness or injury) you incur while holding the health insurance policy. By reimbursing you for incurred medical expenses or by paying medical providers directly, health insurance plans help you manage high healthcare expenses by sharing the cost of medical care with the insurance company.

Participants enrolled in a health insurance plan typically pay a monthly premium to the insurance company, and in exchange, the health insurance company pays for an agreed-upon list of healthcare services and coverage, as outlined in the plan's documents. The cost of the plan (the premiums you'll pay), deductible, copayment, out-of-pocket maximums, and prescription drug coverage can vary from plan to plan. (See below for definitions of common insurance terms).

Every health insurance plan is different, so it's important to research your choices, understand the health insurance costs associated with each plan, and know what your plan does and doesn't cover. For example, most health insurance plans don't cover services for routine dental and vision care. Knowing what your plan covers ahead of time can help you select the best insurance plan for your (or your family's) anticipated medical needs. Plans may provide essential health benefits by covering services like:

• Preventive care and wellness check-ups
• Doctor visits and outpatient care
• Hospitalization
• Prescription drugs
• Emergency room services
• Urgent care services
• Chronic disease management
• Behavioral and mental health
• Maternity care
• Rehabilitative Services

When shopping for health insurance plans, you have several choices. Health insurance plans can be purchased:

• Independently through a state or federal health insurance Marketplace like healthcare.gov (made available via the Affordable Care Act (ACA))
• Through an employer if group health coverage is offered and available to you as an employee benefit
• Directly from a private health insurance company
• Through a licensed health insurance professional (agent/broker)
• From a government-sponsored program like Medicare, Medicaid, Department of Defense TRICARE/TRICARE for Life, or the Department of Veterans Health Administration (VHA) for those who meet eligibility requirements

Open enrollment periods—typically offered every year in the fall—are times when you can sign up for or change your health insurance policy. Outside of open enrollment periods, if you have a qualifying life event (QLE), you can typically purchase health insurance within a 60-day window of the qualifying event (90 days for TRICARE), sometimes referred to as a special enrollment period. Qualifying events for major life changes can include events like:

• Job loss
• Retirement
• Marriage
• Divorce
• Having a baby or adopting a child
• Loss of family member
• Starting a new job
• Relocating

For government-sponsored programs, enrollment in health insurance plans varies based on the plan. For example, initial enrollment in Medicare generally occurs during a 7-month window that starts 3 months before you turn 65 and ends 3 months after you turn 65. There is also an annual enrollment period for Medicare which typically runs from October through December, and can be a good time to review a Medicare Advantage plan or Part D prescription drug plan and make any changes, if needed. Tricare for Life automatically starts once you have both Medicare Parts A and B, if you're eligible.

With Medicaid and VHA, there is no open enrollment period, you can apply at any time if you qualify for the program.

There are many different types of health insurance plans available, and navigating your options can sometimes be overwhelming. Choosing the right plan and health care coverage for you depends on your anticipated medical needs, the costs associated with the plan, and what the plan covers.

Below are four common types of health insurance plans and some key features for each plan.

• HMOs (Health Maintenance Organization): HMO premiums are typically one of the least expensive, but compared to other health insurance plans, they can have the most restrictions and the least amount of flexibility. Variations exist from plan to plan, but some common features of HMOs are that you typically must select (or be assigned) a primary care physician who coordinates and manages your medical care. Outside of an emergency, eligible costs are usually only covered by using their in-network doctors and hospitals. And, generally speaking, you need a referral from your primary care physician if you want the insurance plan to cover the cost to see a specialist or to receive certain medical care.
• PPOs (Preferred Provider Organization): PPO insurance premiums are often seen as more expensive compared to HMOs, but in return, PPOs offer more flexibility in terms of choosing your healthcare provider and/or specialist. With PPOs, you can typically choose a physician or hospital that you prefer in-network and may not need a primary care physician referral in order to see a specialist. If you choose to see a physician that is out-of-network, you will likely pay more than if you saw an in-network doctor, but the insurance plan may still share some of the cost with you.
• EPOs (Exclusive Provider Organization): An EPO plan combines features of an HMO and a PPO plan. Similar to an HMO plan, the plan only covers in-network care, but unlike the HMO plan, you don't typically have to select a primary care physician, and you can usually see an in-network specialist without a referral (like a PPO). Premiums for EPOs are generally higher than HMOs, but are usually lower than PPOs. Similarly, out-of-pocket costs will likely be higher than HMOs and more comparable to PPOs.
• HDHPs (High Deductible Health Plan): Compared to a traditional plan, a HDHP typically has a lower monthly premium in exchange for a higher annual deductible. A participant enrolled in a HDHP will typically pay out-of-pocket for medical services until they meet their deductible. Once the deductible is met, the insurance company begins covering a portion of the cost as defined in the plan. A key feature with certain HDHPs is that participants who are enrolled in a health savings account (HSA)-eligible HDHP can save and invest extra money for future medical needs in a tax-advantaged way.

When reviewing health insurance plans, there can be insurance terminology that's confusing if you're not familiar with the terms. Having a basic understanding of common insurance terminology can help you make sense of your plan and make better decisions about which plan to enroll in. Health insurance terms commonly used in the health insurance industry include:

• Premium: The amount you pay as a policyholder (usually monthly) to maintain your health insurance coverage with your insurance provider. To keep your policy active, you must pay the premium, regardless of whether you utilize any healthcare services.
• Deductible: This is the amount you'll pay for covered health care services before your policy starts to cover any costs. For example, if your deductible is $1,500, you'll be responsible for paying the first $1,500 of covered services. Once you reach $1,500 (your deductible amount), your insurance will start paying—and you'll just pay the copay or coinsurance, if any.
• Copay: A copay (or copayment) is the fixed amount you pay for covered health care services before or after a deductible is met. Copays are typical for routine services or prescription drugs. For example, you might need to pay a $20 copay when you see your primary care doctor—and a $30 copay when you see a specialist.
• Coinsurance: This is the percentage of covered health care services you'll pay once your deductible is met (versus a copay which is a fixed amount). Coinsurance is typically applied to more expensive, less frequently used services. For example, you might pay 20% of the cost for a medical procedure (like an X-ray or MRI), and your policy might pay 80%.
• Annual out-of-pocket maximum: This is the maximum amount you'll have to pay out of your own pocket each year for covered health care. Once you reach the annual out-of-pocket max, your policy will pay 100% of your covered services for the year. But you'll still need to pay your monthly health insurance premiums.
• In-network providers: In-network providers refer to a group of healthcare providers like doctors, hospitals, and pharmacies that have a pre-established contract with a health insurance provider to offer medical services at pre-negotiated rates. Typically, in-network providers offer lower out-of-pocket costs for patients enrolled in the plan.
• Out-of-network providers: Out-of-pocket providers refer to a group of healthcare providers like doctors, hospitals, and pharmacies that do not have established contracts with a health insurance provider. Typically, out-of-network providers result in higher medical bills for patients compared to in-network providers.

Even if health insurance isn't mandatory, it's a good idea to have it because of the key benefits it can provide like:

• Protecting you (and your family) from both unexpected and planned medical expenses. Without health insurance, you're typically responsible for covering the full out-of-pocket cost for any medical care you or an immediate family member incur. If you have an unexpected event like a child who suffered from a serious injury while playing in the backyard, any medical bills associated with the injury and/or medical care received may be your financial responsibility to pay and could result in a significant amount of debt if you don't have a sufficient amount of cash on hand.
• Helps you from tapping your other savings accounts to pay for high medical bills and allows you to save for other financial goals. If you don't have health insurance and you have high medical bills, you might be forced to use funds from other sources like your retirement savings to pay for medical expenses.
• Can potentially protect you from bankruptcy. Medical bills are the number one cause of bankruptcy according to a recent study in the American Journal of Public Health, noting that two-thirds of bankruptcies indicate medical bills as the leading cause for the filing.
• Can help catch potential health issues before they become more serious through preventative care and wellness screenings. Early intervention can help you address health concerns before they escalate, often resulting in better outcomes and lower long-term medical costs.

You want to have a policy in place before you need medical care. Timing is critical, since insurance might not immediately cover medical conditions you had before you enrolled in your plan—and definitely won't cover health care costs you had before you enrolled. If you don't have health insurance, explore your coverage options to see what best fits your current circumstances.

Insurance coverage will change. Review your health insurance policy annually during the benefit enrollment period to be sure your health care coverage is cost-effective and appropriately meets your needs. Some questions to answer during your annual health care insurance review may include:

• If you got married recently or have a new child, are your new family members covered under the plan? You may also qualify for a QLE.
• What procedures or visits are you planning for the upcoming year?
• What are your deductible, copays, coinsurance and annual out-of-pocket maximum, and are you including these costs in your budget?
• Are your preferred doctors and hospitals considered in-network?
• Would a lower monthly premium and higher deductible be better for your budget?
• If you have an HSA-eligible high-deductible health plan (HDHP), are you putting money into a Health Savings Account (HSA) to cover at least the cost of your deductible and get valuable tax savings?