What Is a Health Insurance Premium?

A health insurance premium is an upfront payment made on behalf of an individual or family in order to keep their health insurance policy active. Premiums are typically paid monthly when purchased on the individual market, although individuals who receive insurance through their employer usually pay their portion of the premium through payroll deductions. In addition to the premium, consumers may have to pay out-of-pocket costs—deductibles, co-pays, and coinsurance—when they seek medical care. 

Key Takeaways

  • When all other factors are the same, plans with a higher premium will generally have lower out-of-pocket expenses than other plans from the same insurer.
  • High-deductible plans with a lower monthly premium may end up being less expensive overall if you or your covered dependents require relatively little medical care.
  • If you're not eligible for medical insurance through work, you may qualify for government-subsidized coverage through Medicaid or plans sold on a healthcare exchange.
  • Those 65 and older generally pay much lower premiums through Medicare than they would on policies sold on the individual market.

Understanding a Health Insurance Premium

Health insurance premiums are the costs you pay, usually on a monthly basis, to keep your policy in force. If you skip your premium payment, the insurer will eventually drop your healthcare coverage.

Premiums are not the only expense you incur to receive medical care. Even after paying your monthly fee, you may have to pay out-of-pocket expenses based on the amount and type of care you receive. These include:

  • Deductibles: The amount of the medical bill you have to pay before your insurance starts paying claims.
  • Copays: Copays are a fixed amount you have to pay for expenses such as doctor visits and prescription drugs at the time of service. The insurance provider pays all, or part of, the remaining amount.
  • Coinsurance: A percentage of the medical bill you have to pay, even after reaching your deductible. The insurer pays the remaining portion of the bill.

The amount of these out-of-pocket expense limits tends to vary from one insurance plan to the next. Even the same insurer may have different plan tiers. Typically, the higher the cost of your premium, the fewer out-of-pocket expenses you incur.

Plans also have an annual out-of-pocket maximum. Once that amount is met, you no longer have to pay coinsurance or copays for the covered medical expenses you sustain.

Special Considerations

Many employers offer health insurance as part of their benefits package, typically paying part of the premium for their workers. One of the reasons they do this is to comply with the Affordable Care Act (ACA), which requires employers with 50 or more full-time workers to provide coverage that meets minimum value and affordability requirements. Businesses that don’t comply face significant monetary penalties.

According to a survey conducted by the Society for Human Resource Management, 20% of employers indicated their health-related benefits continue to rise, with costs ranging as high as $15,000 per employee in 2019. The costs for health care can be substantially higher for individuals who don’t receive an employer premium subsidy; either because they don’t work or don’t have insurance through their job.

Low- and middle-income individuals without employer coverage have a couple of options to reduce their premiums. One is to check whether they’re eligible for Medicaid, a state-administered federal program that typically offers lower premiums than those sold on the individual market. More than two-thirds of beneficiaries receive care through managed care plans that have a contract with their state, according to the Kaiser Family Foundation. Others receive medical care on a fee-for-service basis.

Even if you earn too much to qualify for Medicaid, you may also be eligible for a premium tax credit, or government subsidy, if you shop for plans on a health insurance exchange and meet the income requirements. To qualify for relief, you'll likely need an income below 400% of the federal poverty line.

For adults 65 and over, Medicare uses payroll tax revenue to provide a more affordable option than members in this age group would typically find on the private market. Most recipients don’t pay any premium for Medicare Part A, which covers hospital costs. In 2021, the standard monthly premium for Part B, the section that reimburses for medical services and supplies, is $148.50 per month, while the annual deductible is $203. That cost can be higher or lower, depending on your income and whether you receive Social Security benefits.

Example of a Health Insurance Premium

Suppose you’re shopping for health insurance on the individual market because your employer does not offer coverage as part of its benefits package. Insurer XYZ has two plans.

The first plan has a monthly premium of $800 with a yearly deductible of $1,000 and a coinsurance set at 20%. The second plan offered by XYZ has a monthly premium of only $400, but a higher deductible of $5,000 and a coinsurance of 30%.

The first option will cost you twice as much in premiums. Consequently, if you incur relatively few medical expenses for the year, your medical costs will be more expensive than if you purchase the second plan.

However, you may wish you had that first plan if you end up with an overnight hospital visit or need several trips to the doctor’s office throughout the year. Once you pay the first $1,000 in covered medical expenses, your plan will pay 80% of the remaining costs until you reach the out-of-pocket maximum. Keep in mind, though, that you would still be responsible to pay 20% in coinsurance.

One advantage of high-deductible health plans, which come with lower premiums, is that they enable you to pay out-of-pocket expenses through a health savings account (HSA). Contributions to an HSA are tax-free and so are withdrawals, as long as they’re used for a qualified medical expense. For 2020 and 2021, individual plans with a deductible of over $1,400 and family plans with a deductible of at least $2,800 qualify as high-deductible health plans.