What is Medical Insurance? Do I Need to Take One for Myself?

what is medical insurance

When you were a kid and into your teen years, you were under your parent’s medical insurance plan. You may have still had coverage or assumed automatically that you didn’t need it in your college years. Now, as you’re settling into adult life, medical insurance keeps nagging at the back of your mind. Getting medical insurance isn’t necessarily a no-brainer. Insurance policies can be expensive and complicated, and it seems like there are more reasons not to get insurance. Do you need medical insurance? Like, really need it? Before that, lets first understand what is medical insurance.

And even if you do need it, you have only a vague idea of how medical insurance works. Can you get medical insurance online? Do you need to have money saved for healthcare expenses even if you have insurance?

All great questions, which is why today we’re taking a deep dive into the world of medical insurance. We’ll be looking at some of the most common objections to getting medical insurance, how medical insurance works, and whether medical insurance is worth it for the penny-pinching millennial.

what is medical insurance
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… but I eat well, exercise, and never get sick.

It’s tempting to think that healthy living can make medical insurance redundant. After all, do you need medical insurance if you take good care of yourself? 

Eating well and exercising means you’ll stay super healthy… most of the time. Unfortunately, illness and accidents can happen to anyone – whether it’s a stroke, cancer, or even an exercise-related injury (talk about ironic). 

When the unexpected strikes and you find yourself in the hospital, medical insurance can make or break you. Not only will some specialty physicians only treat people with insurance, but you’ll find it much more difficult to get coverage if you’re already diagnosed. 

Why would you want medical insurance when you’re already diagnosed with a long-term illness or something requiring ongoing care? Simple. In the US, people who don’t have medical insurance are about twice as likely to have medical debt as those with insurance

That means that medical insurance can make a huge difference. With it, your medical bills are more likely to be something you can budget for. Without, you’re almost guaranteed to be stuck under a mountain of debt that lasts for years.  

… but it’s too expensive and won’t do any good.

It’s no secret that medical insurance is pricey, with $456 a month as the average cost of an individual policy. However, it’s not true that the cost “doesn’t do any good”.

Think of your auto insurance as an example. Yes, your policy might be expensive. As long as you aren’t getting into accidents, you might think that you’re just throwing money down the drain with your policy.

But what happens when you get into an accident? You thank your lucky stars that you’re covered. A couple of hundred dollars a month is nothing compared to the thousands you’d pay out-of-pocket.

Medical insurance is much the same. About 90% of the time, it feels useless to have medical coverage. Sure, the free preventative care – like check-ups and flu shots – are kind of helpful, but are they worth it? Do you need medical insurance when you’ll end up with a co-pay, anyways?

Not until you really need it. When you get into an accident or suddenly learn you’re allergic to shellfish at your BFF’s crawfish boil, you’ll need to go to the ER. And when you get that ER bill and realize that your medical insurance has knocked hundreds or thousands of dollars off your out-of-pocket cost, you’ll be glad you had it!

what is medical insurance
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… but I’ll just start a savings account and pay outright.

Do you need medical insurance if you can pay for your care upfront? You could do this… but it’ll come back to bite you later. First, how likely are you, honestly, to put that money into an account and leave it there? What happens if there’s a non-medical emergency and you dip into that money? 

Second, and this is the real kicker, uninsured medical care is more expensive. Insurance companies negotiate with hospitals and pharmacies. That means that members of an insurance group get charged lower prices than those without insurance. You’ll have to save thousands of extra dollars just to pay for a service that may have cost less than a hundred with insurance.

Finally, what happens if you have a run of bad luck? Say you have appendicitis, then you have an allergic reaction to one of the medications you’re prescribed, and then you get in an accident and break a bone, all in the space of a couple of months. 

Without insurance, you’ll drain your savings with the first hospital visit and you won’t have time to build that account back up. You could try to save for multiple visits, but if you could save hundreds of thousands in a short amount of time, you wouldn’t be worried about the cost of insurance, right?

Do I need medical insurance
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How medical insurance works?

So how does medical insurance work? There are a few things you need to know when it comes to medical insurance. Let’s go over some common terms in medical insurance and when you’ll need to know them.

General Insurance Terms

First, a quick refresher on some general insurance terms. These are terms that aren’t specific to medical insurance, but you’ll need to know them moving forward. 

  • “Premium” – the amount you’ll pay every month
  • Out-of-pocket” – the amount you’ll pay for receiving care
  • Deductible” – the out-of-pocket amount you’ll pay before insurance kicks in, the lower your deductible, the higher your premium (and vice versa)
  • Out-of-pocket maximum” – the amount you’ll pay in a year before the insurance covers everything at 100% of the cost

What do “in-network” and “out-of-network” mean?

First, remember in the last section how we mentioned that uninsured medical care is more expensive? That’s because insurance companies will partner with and negotiate prices with certain hospitals and pharmacies. Why? It’s similar to when you go to a bulk store like Costco or Sam’s Club – buying in bulk is cheaper. 

The insurance companies guarantee that the hospitals will have patients, so the hospitals offer a discount. This is what “in-network” and “out-of-network” means on your insurance policy.

An “in-network” hospital is one where you’ll get services at a discount because of your insurance. Insurance companies will usually offer limited or no coverage at hospitals that aren’t in-network, so make sure you check ahead of time!

What do “Co-Pay” and “Co-Insurance” mean?

Co-pay is the fixed amount you pay for any care you receive after you meet your deductible. For instance, you might have a $20 co-pay listed on your policy. This means that even after you hit your deductible, you’ll be paying $20 out-of-pocket for your care every time you go to the doctor.

Co-insurance, on the other hand, is a fixed percentage that you have to pay for your care. You may have a co-insurance cost of 20%. This means that after you hit your deductible, you’ll still be paying 20% of the total bill. 

Co-pay and co-insurance will really start to make a difference once you hit your deductible. If you have a very high deductible, it’s unlikely you’ll be faced with co-pay or co-insurance charges. 

However, once you hit your deductible and start to get those co-pay costs, it’s important to know that these do count towards your out-of-pocket maximum. That means that your co-pays get you closer to having everything covered at 100% of the cost.

What is a “Catastrophic” medical insurance plan?

When you’re looking at medical insurance, you might see a “catastrophic” plan among your options. These plans have the cheapest premiums, but do you need medical insurance under a “catastrophic” plan? 

First, you may not be eligible for a “catastrophic” plan. These plans are available to anyone under 30 but may be offered to people over 30 if they meet certain exemption criteria. If you do qualify for Catastrophic insurance, you may find it a more affordable up-front cost.

The problem with the low monthly premium is that this insurance won’t cover many other costs. The deductible on these plans is very high. 

How do medical insurance companies make money?

In a word, they make money from you staying healthy! It’s the same as the way auto insurance companies make money from you being a safe driver and homeowner’s insurance policies make money from your home being safe.

Medical insurance companies make money from you staying healthy and not filing a claim. This means that your premium is kept as profit. (This is also why some companies can make it so difficult to file a claim.) 

Since they want you to stay healthy, your medical insurance will cover what’s called “preventative” care. This means that most insurance plans will cover yearly check-ups and flu boosters at 100% of the cost. Some will also offer discounts for healthy living habits, for instance, not using tobacco.

Is medical insurance worth it?

Do you need medical insurance? Ultimately, it’s up to you. As of 2019, you won’t incur a federal penalty for not having health insurance coverage. However, this doesn’t mean you’re out of the woods. Individual states may still require insurance coverage to avoid a tax penalty. 

Besides the legal requirements, do you want to risk being without coverage? In the event that you’re diagnosed with an ongoing illness, finding coverage after the fact will be nearly impossible. 

Why does this matter? People with illnesses that require ongoing treatment will be faced with the largest medical costs. After all, if you’re seeing the doctor multiple times a month, those costs will add up quickly. Having insurance will take some, if not all, of the financial strain off of you and your family as you get closer to meeting your deductible.

Now that you have a better idea of medical insurance terminology, you’re in a good place to shop around. Make sure that you do your research when picking a plan. If you don’t have any negative family medical history, you’re still young, and/or you’re relatively healthy, you can pick a plan with a higher deductible and a lower premium. 

However, the more likely you are to develop a chronic condition, the more important having a low deductible will be, even if that means a higher monthly premium. 

So is medical insurance worth it? You’ll need to make that choice for yourself. Just remember that, like any other insurance, it’s better to pay a little now than to deal with higher costs later. 

You deserve to take good care of your health AND your budget. So for more tips on how, when, and where you can cut costs, sign up for our newsletter. We’ll help you learn the terminology and tricks for insurance, investing, budgeting, and more, so you can start improving your financial hygiene for a brighter future.