Health insurance is an important financial product in the lives of many students. The specifics of how health insurance works, therefore, is an important topic in basic personal finance. The basic health insurance relationship involves the customer who pays monthly premiums to the insurer, who agrees to pay any health care costs higher than a predetermined deductible.
Deductibles and Premiums
Health insurance is a way to transfer risk from an individual to an insurance company. The premium is the cost the customer pays to avoid having to pay the full cost of a major health problem. Each insurance plan has a deductible. This is a number that sets the maximum amount the customer has to pay for medical care. When the bill is higher than the deductible, the insurance company pays the amount beyond the deductible. Generally, lower premium plans have higher deductibles and vice versa.
The Role of Premiums
Premiums vary from policy to policy. They are the result of the insurance company trying to judge how much money they might need to pay out for medical care for a given person and the customer trying to decide what level of insurance is right for him. A person who is at high risk for health problems pays higher premiums.
A claim is the step in the customer-company relationship when the customer has obtained health care and notifies the insurance company that the company is now obligated to cover some or all of the cost of the care. The company may dispute the claim or accept it as is. The insurance company will ask for some proof of the care and its cost and then decide whether the care was covered under the insurance plan and how much money it needs to pay. In many cases, the provider of the care files the insurance claim on the patient's behalf.
Claims vs. Premiums
While claims and premiums are both important parts of the relationship between a policyholder and an insurance company, they have different roles. For the insurance company, the monthly premium offsets the cost of a customer making a claim. Customers would rather pay a smaller monthly bill, the premium, than have to cover a huge, sudden medical care bill. The premium is a transfer from the customer to the company, while the claim process is a customer's attempt to get a reimbursement from the company.
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