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How Major Medical Insurance Works

Understanding medical insurance and how insurance companies work is of paramount importance when you are trying to find the best health care policy for your needs (and budget). The first things you want to understand are your rights and responsibilities.

This page:

  Defines basic health plan terminology you'll want to understand

  Explains out-of-pocket expenses like deductibles, co-insurance, and co-payments

  Describes the legal protections associated with major medical insurance


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Do You Qualify For A Subsidy?


Find out if you qualify for a government subsidy under Obamacare. Millions of Americans will have their insurance rates reduced under the new health care law. Learn how much you could save with our simple calculator.

The health insurance premium

You should see buying a medical insurance policy as more of an ongoing process than a one time purchase. To maintain your health coverage, each month you pay a fee, or premium to your medical insurance company.

This payment is similar to club dues. The money is not earmarked specifically for your use, but is instead the cost of membership. In this case, your premium won't go only towards your future health care services. Instead, this is the fee you pay to be covered by your health insurance company.

The deductible, co-payment and co-insurance

It is important to understand that the cost of health services is not completely eliminated by paying the monthly premium. There are other costs associated with major medical insurance coverage that you have to meet.

The first cost we'll discuss is the deductible. The deductible is a pre-arranged dollar figure that you'll have to satisfy (pay) before the health insurance company begins to contribute any money to your health care costs.

Your deductible can be a significant out-of-pocket expense, particularly because it must be satisfied each year before the company pays. (So paying $1000 this year for medical services will not decrease your deductible next year.)

Deductibles can range from a few hundred dollars to a several thousand. While some health insurance policies do not involve deductibles, others involve them only in certain cases. Again, the higher the deductible, the lower your monthly premiums.

The other expenses you will encounter are co-payments and your co-insurance. All medical insurance policies will require that you agree to one or both of these types of charges. A co-insurance payment means that you will be required to pay a certain percentage of your health care costs, while a co-payment means you'll be required to pay a certain, pre-set dollar amount for each medical service you receive before your medical insurance kicks in.

These are usually charged in addition to your deductible. In either case, the medical insurance company will pay a substantial amount of your medical costs in comparison to your financial responsibility.

The point of having medical insurance is, after all, to alleviate the financial burden on you and your family in case of medical emergencies and/or a chronic illness.


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Other rights and responsibilities

Medical insurance isn't an all-or-nothing proposition. Major medical insurance policies will contain statements that protect both you and your health insurance company from having to pay too much money for services. It has been said that insurance companies don't make money selling insurance but on denying claims. As far as the insurance company is concerned, they will generally limit the coverage they sell you.

Medical insurance companies protect themselves by employing what is called a "lifetime payout provision." Such a provision limits the total amount the health insurance company is responsible for paying in your entire lifetime. This maximum payout is usually in the millions of dollars.

It is important to have a high maximum payout, or you will run the risk of prematurely depleting your coverage just when you need it most.

The provision that protects you is called the out-of-pocket maximum and it limits your out-of-pocket expenses during a given year. Once this limit is reached, your medical insurance company will compensate you for 100% of your health care costs. This limit is particularly important in the event of a serious illness or accident.

Next: The services covered by medical insurance

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This internet site provides information of a general nature for educational purposes only and is not intended to be legal advice. We make no guarantees as to the validity of the information presented. Your particular facts and circumstances, and changes in the law, must be considered when applying insurance law. You should always consult with a competent insurance professional licensed in your state with respect to your particular situation.