What Is a Health Insurance Premium?

A health insurance premium is a monthly fee paid to an insurance company or health plan to provide health coverage. The scope of the coverage itself (i.e., the amount that it pays and the amount that you pay for health-related services such as doctor visits, hospitalizations, prescriptions, and medications) varies considerably from one health plan to another, and there's often a correlation between the premium and the scope of the coverage. The less you have to pay for your coverage, the more you're likely to have to pay when you need health care, and vice versa.

Doctor talking to mother and baby
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In short, the premium is the payment that you make to your health insurance company that keeps coverage fully active; it's the amount you pay to purchase your coverage. The Premium payments have a due date plus a grace period. If a premium is not fully paid by the end of the grace period, the health insurance company may suspend or cancel the coverage.

Other health insurance costs may include deductibles, coinsurance, and copayments. These are amounts that you pay when you need medical treatment. If you don't need any treatment, you won't pay a deductible, copays, or coinsurance. But you have to pay your premium every month, regardless of whether you use your health insurance or not.

Who Pays the Health Insurance Premium?

If you receive health care coverage through your job, your employer will typically pay some or all of the monthly premium. Often, your company will require that you pay some portion of the monthly premium, which will be deducted from your paycheck. They will then cover the rest of the premium.

According to the Kaiser Family Foundation's 2019 employer benefits survey, employers paid an average of nearly 83% of single employees' total premiums, and an average of nearly 71% of the total family premiums for employees who add family members to the plan.

If you are self-employed or buy your own health insurance, you as an individual are responsible for paying the monthly premium each month. However, since 2014, the Affordable Care Act (ACA) has provided premium tax credits (subsidies) that are available to people who purchase individual coverage through the exchange. In order to be eligible for the premium subsidies, your income can't exceed 400% of the federal poverty level, and you can't have access to affordable, comprehensive coverage from your employer or your spouse's employer.

Off-exchange plans purchased since 2014 are compliant with the ACA, but premium subsidies cannot be used to offset their cost.

Example of a Premium

Let’s say that you have been researching health care rates and plans in order to find a plan that is affordable and suitable for you and your loved ones. After much research, you eventually end up selecting a particular plan that costs $400 per month. That $400 monthly fee is your health insurance premium. In order for all of your health care benefits to remain active, the health insurance premium must be paid in full every month.

If you are paying your premium on your own, your monthly bill will come directly to you. If your employer offers a group health insurance plan, the premiums will be paid to the insurance plan by your employer, although a portion of the total premium will likely be collected from each employee via payroll deduction (most very large employers are self-insured, which means they cover their employees' medical costs directly, usually contracting with an insurance company only to administer the plan). 

If you have an individual health plan through the exchange and are receiving a premium subsidy, the subsidy will be paid by the government, directly to your insurance company. The remaining balance of the premium will be invoiced to you, and you'll have to pay your share in order to keep your coverage in force. Alternatively, you can choose to pay the full amount of the premium yourself each month and claim your total premium subsidy on your tax return the following spring. (This is not a common option, but it's available and the choice is yours. If you take the subsidy upfront, you'll have to reconcile it on your tax return using the same form that's used to claim the subsidy by people who paid full price during the year).

Deductibles, Copays, and Coinsurance

Premiums are set fees that must be paid monthly. If your premiums are up to date, you are insured. The fact that you are insured, however, does not necessarily mean that all your healthcare expenses are paid for by your insurance plan. 

  • Deductibles. Deductibles, according to Healthcare.gov, are "the amount you pay for covered health care services before your insurance plan starts to pay." But it's important to understand that some services can be fully or partially covered before you meet the deductible, depending on how the plan is designed. ACA-compliant plans, including employer-sponsored plans and individual market plans, cover certain preventive services at no cost to the enrollee, even if the deductible has not been met. And it's quite common to see plans that partially cover certain services—including office visits, urgent care visits, and prescriptions—before the deductible is met. Instead of having the enrollee pay the full cost of these visits, the insurance plan may require the member to only pay a copay, with the health plan picking up the remainder of the bill. But other health plans are designed so that all services—other than the mandated preventive care benefits—are applied towards the deductible and the health plan doesn't start to pay for any of them until after the deductible is met. The cost of premiums is often closely tied to deductibles: you will generally pay more for an insurance policy that has lower deductibles, and vice versa
  • Co-payments. Even if your health insurance policy has low or no deductibles, you will probably be asked to pay a relatively low fee for medical care. This fee is called a copayment, or copay for short, and it will generally vary depending on the particular medical service and the details of the person's plan. Most plans include both a deductible and copayments, with the copayments applying to things like office visits and prescriptions, while the deductible applies to hospitalizations, lab work, surgeries, etc. Some plans have copays that only apply after a deductible has been met; this is increasingly common for prescription benefits. Copayments may be higher if monthly premiums are lower.
  • Coinsurance. Healthcare.gov describes coinsurance as follows: "the percentage of costs of a covered healthcare service you pay (20%, for example) after you've paid your deductible. Let's say your health insurance plan's allowed an amount for an office visit is $100 and your coinsurance is 20%. If you've paid your deductible, you pay 20% of $100, or $20." Coinsurance generally applies to the same services that would have counted towards the deductible before it was met. In other words, services that are subject to the deductible will be subject to coinsurance after the deductible is met, whereas services that are subject to a copay will generally continue to be subject to a copay.

Deductibles, co-payments, and coinsurance are applied toward a patient’s annual out-of-pocket maximum. The yearly out-of-pocket maximum is the highest total amount a health insurance company requires a patient to pay themselves towards the overall cost of their health care (in general, the out-of-pocket maximum only applies to in-network treatment for covered, medically-necessary care in which any prior authorization rules are followed).

Once a patient’s deductibles, copayments, and coinsurance paid for a particular year add up to the out-of-pocket maximum, the patient’s cost-sharing requirements are then finished for that particular year. Following the fulfillment of the out-of-pocket maximum, the health plan then picks up all of the cost of covered in-network care for the remainder of the year.

So if your health plan has 80/20 coinsurance (meaning the insurance pays 80% after you've met your deductible and you pay 20%), that doesn't mean that you pay 20% of the total charges you incur. It means you pay 20% until you hit your out-of-pocket maximum, and then your insurance will start to pay 100% of covered charges. However, premiums must continue to be paid, every month, in order to maintain coverage.

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Article Sources
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  1. Kaiser Family Foundation. Employer Health Benefits, 2019 Summary of Findings. September 25, 2019.

  2. Internal Revenue Service. Form 8962. Premium Tax Credit.

  3. Healthcare.gov. Deductible.

  4. Healthcare.gov. Coinsurance.