Deductibles for Short Term Health Insurance
When you’re shopping for health insurance, you may notice that “deductibles” play a big role in determining your coverage and cost. Whether you’re buying a traditional health plan with all the bells and whistles, or a short term health insurance policy to bridge the gap between major medical plans, you’ll need to understand what a deductible is and how it ties in with your health plan. As with any kind of insurance – home, auto, renters, etc. – a deductible serves as the point at which your insurer will start covering claims. Here’s what you need to know about deductibles when buying short term health insurance.
What is a Deductible?
Simply put, a deductible is the dollar threshold that you must cross before an insurance company pays its share of your covered medical bills. Amounts vary by plan, specifically the level of coverage you’ve purchased. Deductibles work the same way regardless of whether you’ve bought a major medical policy or a short term plan. The amount may differ widely even among the same type of insurance, but the process is usually the same:
- Let’s say you have a deductible of $2,500 for your short-term policy.
- You get in an accident and end up in the hospital. Your insurer agrees to pay the claim since your accident isn’t based on any excluded conditions.
- Before the insurer will pay its share of the claim (let’s say 70 percent), you’ll have to pay your deductible out of pocket up front.
- If your hospital bill ends up being $20,000, you’ll pay the first $2,500 and 30 percent of the rest of the cost after your insurer covers its portion.
- Your out-of-pocket cost for the hospital bill would be around $7,750 (the deductible plus your coinsurance amount of 30%), saving you over $12,000 in medical costs.
Auto and homeowners insurance work the same way, as does any policy that includes a deductible. Before your insurance company will pay anything, you must satisfy the deductible. If you get in an auto accident and need to repair your car, your insurance company will require you to meet a deductible first, usually around $500 to $1,000 depending on your coverage. The company will then pay the difference after that.
As a general rule, the lower your monthly premium, the higher your deductible, and vice-a-versa. Major medical plans under Obamacare cover more and cost more than short term plans, but don’t assume that these plans have lower deductibles as a result. The same logic applies to major medical – the higher the premium, the lower the deductible. But compared against temporary health plans, major medical policies may actually have higher or lower deductibles. How much you spend per month for insurance and in out-of-pocket medical costs will vary from plan to plan and plan type to plan type.
Per Claim vs. Per Term
In the health insurance world, deductibles are typically – but not always – set per term of the contract, not per incident or claim. But since some insurance companies do offer short-term policies with per-incident deductibles, you should understand the difference.
With per-incident or per-claim deductibles, you’ll need to meet a deductible (a set amount of money) first before your insurance company pays its share every time you file certain claims. If you buy a temporary health plan that lasts three months and through a series of truly unfortunate events, break each limb four separate times during that three-month contract, then you would have to meet a deductible for each incident of a broken limb. As you might imagine, that could get costly pretty quickly. Instead of paying one $2,500 deductible for the contract, you would pay however much the deductible is per incident.
Per-term deductibles are much more common. In major medical plans, the term is one year, which makes deductibles for these plans proportionately lower since short term plans can’t last more than three months. Example:
- You have a short term policy of three months with a $2,500 deductible. These plans are not renewable as of 2018, meaning you would need to buy a new policy with a new deductible for each additional term of three months. If you have four, three-month contracts, those separate deductibles add up to $10,000 for the year.
- By contrast, if you had a major medical plan with a $7,500 deductible, then you would only need to meet that deductible once for the 12-month period. You would save money (in deductibles) by buying a major medical plan, assuming you reached your deductibles at all for either scenario.
Before you buy a short term policy, check to see if the plan includes one deductible for the whole term or separate, individual deductibles per claim or incident. One isn’t necessarily better than the other, but you’ll need to do the math to see which option makes more economic sense for you.
Average Deductibles for Short Term Plans
Comparing deductibles between short term medical plans and major medical policies is difficult because, as mentioned above, the terms are different, as is the coverage. Short term plans by law can’t last longer than three months, although that might change in the coming year. Major medical policies last for 12 months, four times longer than their temporary counterparts. It’s worth noting that the average deductible for a bronze plan (the cheapest metal tier on the Obamacare marketplaces) was $5,938 a year in 2018. A 30-year-old would pay just under $380 a month for that coverage while a 60-year-old would pay over $900 a month for the same plan.
Short term coverage typically costs much less. In 2017, a 30-year-old paid an average of about $79 a month for temporary coverage ($272 a month for a 60-year-old), and the average deductible hit $3,434 for the term. On the surface, it seems that short term plans cost less or require less out of pocket, but let’s compare these costs side by side:
- Let’s simplify the math and say that your deductible for a short term plan is $3,000 for a three-month term. You pay $80 a month for this plan. And let’s assume that you’re able to get four separate policies (to total a year’s worth of coverage) back to back, same deductible and same premium.
- Over the course of the year, you’ll pay $960 in premiums ($80/month) and $12,000 in four separate deductibles of $3,000 each. That totals $12,960. For the sake of comparison, let’s also assume that your short term plan has no out-of-pocket cap on your expenses (even though this is unlikely).
- Now, let’s suppose that you buy a bronze-level major medical policy from an ACA exchange instead. Your premium is $400 a month and your deductible is $6,000. With these amounts, you would pay $4,800 in premiums ($400 x 12) and $6,000 for the deductible for the whole year, totaling $10,800.
Just based on these raw numbers, you would still save money by getting a major medical plan, assuming it’s available to you and you can afford higher monthly premiums.
Of course, these amounts only represent deductibles and premiums. They don’t factor in things like coinsurance or copayments, which would boost your total for the year. We’ve also ignored out-of-pocket maximums, which major medical plans must legally have and which short term plans typically have (though out-of-pocket caps are usually higher with temporary policies). Plus, you may find a better deal on Obamacare exchanges since people earning between 100 and 400 percent of the federal poverty limit qualify for subsidies to reduce monthly premium costs.
All of this is to highlight one key thing about shopping for health insurance: When you’re adding up the numbers on health plans, you need to consider the full picture. Do the math on deductibles, coinsurance, premium costs and actual coverage. Don’t assume that a lower premium number means lower costs to you. As we said earlier, lower premiums almost guarantee higher deductibles. Figure out what works for your budget. Short term health insurance offers limited protection for times of transition, so crunch the numbers carefully to maximize your benefits.
