What Is a Health Insurance Premium?
A health insurance premium is an upfront payment made on behalf of an individual or family to keep their health insurance policy active.
Premiums are typically paid monthly when purchased on the individual market, while those with health insurance through their employer usually pay their share of the premium via payroll deductions. In addition to the premium, consumers may have to pay out-of-pocket costs including deductibles, copays, and coinsurance when they seek medical care.
Key Takeaways
- Health plans with higher premiums tend to have lower out-of-pocket expenses, all else being equal.
- High-deductible health plans with a lower monthly premium may prove less expensive overall if you or your covered dependents require relatively little medical care.
- If you're not eligible for medical insurance through work, you may qualify for government-subsidized coverage through Medicaid or plans sold on a healthcare exchange.
- Those 65 and older generally pay much lower premiums through Medicare than they would for policies sold on the individual market.
How Health Insurance Premiums Work
Health insurance premiums are the costs you pay, usually monthly, to keep your policy in force. If you stop making premium payments, the insurer will eventually end your healthcare coverage.
Premiums are not the only expense you incur to receive covered medical care. On top of the monthly fee, you will likely face additional out-of-pocket medical expenses. These include:
- Deductibles: An annual amount you must pay for covered care before your insurance starts paying claims.
- Copays: A copay or copayment is a fixed amount you have to contribute toward the cost of doctor visits, prescription drugs, and other healthcare when the service is provided. The insurance provider pays all or part of the remaining amount.
- Coinsurance: A percentage of the medical bill you have to pay, even after reaching your deductible. The insurer pays the remaining portion of the bill.
The particulars for out-of-pocket expenses vary from one insurance plan to the next. Even the same insurer may have different plan tiers. Typically, the higher your premium, the fewer out-of-pocket expenses you incur.
Many plans also have an annual out-of-pocket maximum. When that amount is met, you no longer have to pay coinsurance or copays for the covered medical expenses you sustain.
Employer-Sponsored Health Insurance Premiums
Many employers offer health insurance as part of their benefits package, typically paying a portion of the premium for their workers. One of the reasons they do this is to comply with the Affordable Care Act (ACA), which requires employers with 50 or more full-time workers to provide health insurance coverage that meets minimum value and affordability requirements. Businesses that don’t comply face significant monetary penalties.
Health insurance costs can be substantially higher for those without access to an employer plan.
Medicaid Health Insurance Premiums
Low- and middle-income individuals without employer coverage have a couple of options to reduce their premiums. One is to check whether they're eligible for Medicaid, a state-administered federal program that typically offers lower premiums than those for policies sold on the individual market. More than two-thirds of beneficiaries receive care through managed care plans that have a contract with their state, according to the Kaiser Family Foundation. Others receive medical care on a fee-for-service basis.
Even if you earn too much to qualify for Medicaid, you may also be eligible for a premium tax credit if you shop for plans on a health insurance exchange. These are available for Silver plans in the ACA marketplace, ensuring premiums amount to no more than 8.5% of a household's modified adjusted gross income. The income eligibility requirement limiting premium tax credits to those with household income of no more than 400% of the federal poverty line has been suspended since 2021 and through 2025 under the American Rescue Plan Act and the Inflation Reduction Act Of 2022.
Medicare Health Insurance Premiums
For adults 65 and over, Medicare uses payroll tax revenue to provide a more affordable option than members in this age group would typically find in the commercial marketplace. Most Medicare participants don't pay a premium for Medicare Part A, which covers hospital costs. However, there is a monthly premium for Medicare Part B, which reimburses for outpatient medical services and supplies.
For 2024, the standard Medicare Part B monthly premium is $174.70 per month, up from $164.90 per month in 2023. The annual Plan B deductible is $240 for 2024, up from $226 for 2023.
That cost can be higher or lower, depending on your income and whether you receive Social Security benefits. After your deductible is met, a 20% coinsurance applies to your Medicare-approved amount for doctors' services and other care.
Example of a Health Insurance Premium
Suppose you’re shopping for health insurance on the individual market because your employer does not offer coverage as part of its benefits package. Insurer XYZ has two plans.
The first plan has a monthly premium of $800 with a yearly deductible of $1,000 and coinsurance set at 20%. The second plan has a monthly premium of only $400, but a higher deductible of $5,000 and coinsurance of 30%.
The first option will cost you twice as much in premiums. If you incur relatively few medical expenses for the year, your medical costs would likely be lower under the second plan.
However, you may wish you had that first plan if you end up with an overnight hospital visit or need multiple trips to the doctor’s office throughout the year. When you pay the first $1,000 in covered medical expenses, your plan will pay 80% of the remaining costs until you reach the out-of-pocket maximum. Keep in mind, though, that you would still be responsible for paying 20% in coinsurance.
One advantage of high-deductible health plans, which typically come with lower premiums, is that they enable you to pay out-of-pocket expenses through a health savings account (HSA). Contributions to an HSA are made on a pre-tax basis, and withdrawals are exempt from income tax as well, as long as they’re used for a qualified medical expense. For 2022, individual plans with deductibles of over $1,400 and family plans with deductibles of at least $2,800 qualify as high-deductible health plans. For 2023, the deductible thresholds increase to $1,500 for single coverage and $3,000 for a family plan.
What Does Premium Mean in Health Insurance?
A health insurance premium is a payment made to keep your health insurance policy active. Premiums are normally paid monthly when purchased on the individual market. People with health insurance through their employer usually pay their share of the premium via payroll deductions.
How Often Are Health Insurance Preimums Due?
Health insurance premiums are normally paid monthly. If you purchased a health insurance plan for yourself, you'll have to arrange these payments yourself. If your employer provides your health insurance, your premiums will normally come straight out of your paycheck.
Are Lower Health Insurance Premiums Better?
It depends. The total cost of your healthcare plan includes additional out-of-pocket medical expenses on top of your premiums. Plans with high premiums tend to have lower out-of-pocket expenses, so if you incur a lot of medical expenses it may be cheaper to go for a plan with a high premium.
The Bottom Line
A health insurance premium is a payment made to keep your health insurance policy active. These payments are normally due monthly, and are an important component of the overall cost of your healthcare plan.
A plan with low premiums might save you money. However, health plans with higher premiums tend to have lower out-of-pocket expenses, all else being equal. This means that high-deductible health plans with a lower monthly premium may prove less expensive overall if you or your covered dependents require relatively little medical care.
