July 20, 2010

What Would Individual Health Insurance Cost Me?

The other day I wrote "Investigating Side jobs and Alternate Incomes where I talked about how I'd like to find myself some other income streams.   In a comment to that article a reader named Lola asked if I'd accounted for the impact on taxes, health insurance, and other benefits as a self employed person. 

If I were to ever quit my day job then I'd have to figure out how to handle taxes and replace some of the key benefits that my employer currently pays.   Chief among those concerns in my mind is getting health insurance coverage for myself and my wife.   I'd need to make sure that I could pay for health insurance out of pocket and budget for it appropriately.   Unfortunately the cost of health insurance is a fast moving target and its been going up pretty quickly over the years.  So it may be hard to plan for the cost long term.   But we have to start somewhere and figuring out what coverage would cost today is step one.

Over two years I budgeted an estimated $800 a month for health insurance.   I'm afraid I don't remember exactly where I got that figure from.   It may have been a quote off eHealthInsurance or it could have been a ballpark estimate.

There isn't a single answer on how much health insurance costs.   In fact the cost of health insurance depends on how much you want to spend on it.   If I want a higher risk high deductible plan then I will spend less on health insurance, but if I want a plan that covers almost all the costs with little or no deductible then my monthly premium costs will be much higher.   A key element in the cost of health insurance is determining how much coverage you want and how high of a deductible you are comfortable with.  If you want to take on higher risk then you can get a lower monthly premium, but if you want to be confident all your costs are covered then your premiums will be higher.

You also have to compare like plans and look for good value.  Some plans are better than others no matter what, for example I wouldn't spend $20,000 a year on a plan with $0 deductible if I could get a $5000 deductible plan for $5000 in premiums.   If two plans have the exact same deductible, co-insurance and other coverage details but one has a low premium monthly premium than the other then its lower cost.

Determining how much health insurance costs you is a process of deciding what level of coverage you want and finding the best value to meet your needs.

Note:  The premium costs and terms mentioned below are just an example for my situation in my state.  Your own situation is going to be unique and the rates may vary substantially in your state.   To get an idea of health insurance options available to you, you can do a search on eHealthInsurance  for yourself.

I got quotes on  eHealthInsurance for health insurance plans to cover my wife and myself.   The search resulted in over 90 different options with a wide array of monthly premiums, deductibles, co-insurance percentages, total out of pocket maximum spending.  Here are 4 options that covered the spectrum of choices which I've given nicknames of Cheapo, High Deduct, Health Savings and Low Deduct.

Deductible Co-insure Max Premium
Cheapo $15,000 40% $25,000 $125
High Deduct $10,000 30% $20,000 $258
Health Savings $6,000 0% $6,000 $319
Low Deduct $2,000 20% $7,000 $500

If you look at just the monthly premiums then there is a huge range there between $1,500 a year all the way up to $6,000 a year.   The 'Cheapo' plan has the lowest premiums at $125 a month but a very high deductible and high out of pocket maximum cost.   The High Deduct plan has high deductible and out of pocket maximums but both are lower than Cheapo and the premiums are twice as expensive at $258 monthly.    The Health Savings plan has a Health Saving Account (HSA) and while it has a $6,000 deductible that is the maximum you'll have to pay and also about the maximum you can deposit into an HSA for a family.   The HSA plan's premium is $319 a month.    The Low Deduct is closest to a traditional health insurance plan.  It costs $500 a month but as a lower $2,000 deductible.

If my wife and I never got sick or injured then the cheapo plan with the $125 monthly premium would be the cheapest option.   But its extremely unlikely we'd be perfectly healthy forever.    The Low Deduct plan has the lowest deductible but the highest fixed monthly premium costs.

To compare the 4 plans I'll look at the minimum, medium and maximum costs you would incur for each based on spending scenarios reflecting the best case, medium and worst cases.   The minimum cost is just the monthly premium x 12.   That cost assumes we're both in perfect health with no additional out of pocket costs.   The medium cost is assuming about $4,000 in additional medical costs so its the cost of $4,000 in spending plus the 12 month of premiums..   I don't know what our average annual health care spending is but I'm just arbitrarily picking $4,000 to represent the cost if one of us is injured or becomes ill in some way that isn't life threatening.   The maximum cost is the most we could pay out of pocket in a given year. 

So the minimum, medium and maximum costs are :

min med max
Cheapo $1,500 $5,500 $26,500
High Deduct $3,096 $7,096 $23,096
Health Savings $3,828 $7,828 $9,828
Low Deduct $6,000 $8,400 $13,000 

First of all I see that the Health Savings plan is cheaper than the Low Deduct plan in all 3 scenarios.   So I would immediately cross the Low Deduct plan off the list since the HSA option is better overall.   Now lets look at the High Deduct plan versus the Health Savings plan.   In the min and med spending scenarios the High Deduct plan is  $732 a year cheaper than the Health Savings plan.   But in the max spending scenario we'd be spending $13,268 more with the high deductible plan.     This basically leaves me with a choice between the Cheapo plan and the Health Savings plan.    The Cheapo plan would be less expensive in most cases but we could end up with a very substantial bill if we run into high medical costs in any given year.   The Health Savings plan would cost a bit more on any given year but our total maximum costs are much less. 

Given this comparison I think the Health Savings plan is the better option for our situation and risk tolerance of my wife and myself.   The plan would cost us $3,828 to $9,828 per year depending on actual health care costs.   Since the plan is using a Health Savings Account (HSA) some of that spending would be tax sheltered.

The basic process:

1. Get quotes for available health insurance plans on eHealthInsurance
2. Compare the plans and narrow them down to the best options given your needs
3. Once you've got the short list of best options, then compare the minimum, medium and maximum out of pocket costs.
4. Pick your preferred plan.  Your costs are then the range of the minimum and maximum costs.

 Bottom Line:   The cost of health insurance is a highly variable thing that depends on your situation and your needs.   To find out the cost you have to do some research and decide what kind of coverage will work for you.

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