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How Health Insurance Works
In 2006, almost 43 million Americans had no health insurance, which translates into nearly 15 percent of the American population. This might be attributed to the fact that health care costs can be very expensive, and the cost of even the most basic care is steadily rising. Today, the amount Americans spend on health care is four times as much as the government spends on national defense. So it's no surprise that along with increased health care cost comes increased health insurance premiums. Employers typically bear the brunt of the expense for health insurance, but individuals are paying more and more each year as well. In 2006, employer insurance premiums increased 7.7 percent, twice the rate of inflation.

But what exactly is it you're paying for? Where does your monthly premium go if you don't get sick or go to the doctor? What do you do if you're not working or you're self-employed? What's the difference between all of the various plans there are to choose from? The maze of information you have to wade through about claims, co-pays, co-insurance, deductibles and more is enough to make your head swim.

In this article, we'll break down the main types of plans and explain their differences. Keep in mind that there are always variations in individual plans, but we'll at least give you a head start when you're trying to select the right plan and coverage for you.

Health Insurance Defined

Insurance is a bit like a gamble between you and the insurance company. The company bets that they'll take in more money in premiums than they have to pay out in benefits, whether it's for health insurance, auto insurance, life insurance or homeowners insurance. You're paying a premium every month just in case something happens.

Deductibles are set amounts

of money you have to pay

in order to use

health insurance benefits.

Health insurance is a contract between you and the insurance company that says that the insurance company will pay a portion of your medical expenses if you get sick or hurt and have to visit a doctor's office or hospital. Some contracts also specify that the insurance company will pay a portion of your medical expenses to ensure you don't get sick, such as paying for annual physicals or immunizations. However, the amount of your bill that the insurance company will pay, and under what circumstances they'll pay it is known as coverage and can vary greatly from policy to policy.

The contract, or policy, spells out what the insurance company will pay for and how much of the bill you will have to pay. For example, the policy may cover an office visit, but you may have to pay a $20 co-payment. Or, the policy may not cover anything until you've paid an agreed upon amount out of your pocket, which is known as a deductible. These deductibles and co-payments, along with any other nonreimbursable expense you may pay is referred to as an out-of-pocket-expense. Other policies may have co-insurance, which is a percentage of the bill that you're required to pay, which may be in addition to your deductible and co-payment. Often, the total amount of co-insurance you have to pay in a given policy is capped by the policy's maximum. The policy will also state the amount you have to pay each month for the coverage, known as the premium, and the total amount the insurance company will pay out for the life of the policy, which is commonly referred to as a lifetime maximum.

Since a single hospital stay could wipe out your savings (and more), not many people can afford to go without some kind of health insurance -- even if they're healthy. Not only will health insurance protect you from bankruptcy in the event of a major medical event, it also gives you peace of mind.


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