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What’s a Health Insurance Premium?

Healthcare Writer

Last updated October 26th, 2020

Reviewed by Garrett Ball

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The amount you pay for your health insurance plan each month is called your “premium”. Think of your premium as a monthly subscription fee. You’ll only hear this term used to refer to your monthly bill.

health insurance premium example on calendar

Your age, where you live, local laws, the size of your health insurance network, and the type of plan you choose will all contribute to your premium’s price.

It’s much easier to budget for healthcare once you know how much your medical insurance premium is. Premiums will be more unique to you than fixed costs like copayments, which are the same for all members on your insurance plan.

Who Pays Insurance Premiums?

You’ll generally pay your premium every month, all at once. Your health plan premium is separate from any other bills you may get from your doctor or insurance.

The primary policyholder is generally in charge of paying the entire premium. This means that if you get health insurance from a parent or spouse, it’s up to them to pay everyone’s bill. Even if your health insurer lets different plan members help pay, the final responsibility falls to the main policyholder.

Employer Coverage: If you get health insurance from your workplace, then your company usually pays some or all of your premium.

Average Health Insurance Premiums

If you’re looking for a single standard health insurance price, there’s no correct answer. But it’s fair to say that premiums are relatively costly if you’re getting health insurance on your own, without subsidies or employer help.

Average Premiums by State or Location

As of October 2020, the average national benchmark monthly premium (used for measuring other plans) was $509. That 50-state average disguises many local differences.

The highest benchmark premium was in Wyoming, at $865 per month. Minnesota had the lowest benchmark premium at $326.

The lowest premium we could find for any Affordable Care Act (ACA), or Obamacare, coverage was in Rhode Island, where a 40-year-old would pay $215 per month for the lowest-cost bronze plan.

Average Premiums by Metal Level or Plan Type

The more generous your plan is, the more expensive it will be. For example, a gold-level PPO plan with many doctors will have a larger monthly premium than a bronze-level HMO plan with fewer doctors. In 2020, average premiums were:

  • $331 for bronze plans
  • $442 for silver plans
  • $501 for gold plans
  • $40 to $150 for short-term (non-ACA) plans

Average Premiums by Year

After several years of price increases, premiums for individuals and families (like ACA plans) seemed to stabilize in 2019. The federal government found that major medical plan premiums actually dropped by an average of 1.5 percent from 2018 to 2019.

For a 27-year-old, single non-smoker on a middle-of-the-road silver plan, costs were:

  • 2017 – $260
  • 2018 – $412 (36.9% increase)
  • 2019 – $406 (1.5% decrease)

In contrast, Mercer’s National Survey of Employer-Sponsored Health Plans found that premiums for group health insurance rose by an average of 2 to 6 percent per year from 2009 to 2019.

Costs of employer insurance are typically hidden from view. Each workplace is different, and they generally pay most or all of the premium for insurance that they offer. As insurance becomes more expensive, it may affect wages or other benefits that employers are able to deliver.

Milliman Insight claims that 2018 had the smallest increase in total healthcare costs – like fees for drugs and doctors – in 18 years (4.5%). After a run of extraordinarily expensive years, this fact is not as comforting as it could be. Experts disagree on causes and solutions, as premium costs have risen before and after the passage of the ACA.

All of the ACA metal type plans can have lower monthly premiums if you qualify for income-based subsidies. Separately, people on Medicare who have limited finances may be eligible for Medicaid assistance.

How Are Premiums Calculated?

Premiums go up for everyone when healthcare costs more, and premiums rise for you specifically when you are riskier to insure.

what premiums are based on coin graph

There are limits to how widely companies can charge different people for the same plan, and as to how much profit insurers can make from a plan.

Premiums are generally based on your:

  • Age (up to 300% of the lowest “base rate”)
  • ZIP code
    • Doctor availability and overall neighborhood health make a difference here.
  • Smoking status (up to 150% of the base rate)
  • Plan type (whether a metal level or an ACA alternative)

Individual states can limit how much premium prices depend on this information (if at all), and how much your premium will change each year. Some states only allow price differences based on ZIP code, or require premiums to be based largely on age.

Premiums are unique to every person, and can seem almost random. Health insurers don’t disclose their exact methods, but we know what tools they are allowed to use.

This is why websites like HealthCare.com must collect a certain amount of information to show you an accurate list of prices.

Some premiums may also be based on your:

  • Health history (also called preexisting conditions or called medical underwriting)
  • Gender

Short-term plans and supplemental Medicare coverage may consider this information when setting monthly premium rates. Affordable Care Act plans cannot change your monthly premiums based on these items.

How Premiums Interact with Key Health Insurance Definitions

There aren’t many words around your health insurance plan more important to know than “premium”. Premiums are separate from these other basic components of your health insurance.

Maximum Out-of-Pocket (MOOP) and Premiums

Your health plan will pay 100 percent of your bills after your combined out-of-pocket spending for doctors, drugs, and other services reaches a certain amount.

You have to stay on your health plan to use it, though! Continue paying monthly premiums even if you reach your out-of-pocket spending limit.

Monthly premiums don’t count towards your maximum out-of-pocket spending.

Coinsurance and Copayments, and Premiums

When you’re responsible for a percentage of a medical bill – say 30% – then you’re paying coinsurance. When you’re responsible for a fixed payment during a medical visit – perhaps $20, no matter the final cost – then you’re paying a copayment.

Premiums do not affect these common costs. These are set by your insurer before you join your plan. You cannot shift your premium dollars to your coinsurance.

Deductibles and Premiums

When you first start to use your health insurance, you’ll pay attention to your deductible. A deductible is an amount you pay before your health plan begins to contribute to your medical care.

Regrettably, your premium generally doesn’t count towards your deductible. Your premium is a separate bill.

What About Those Premium Subsidies?

Many people, particularly those with Affordable Care Act plans, get payment help with their monthly premiums. These are called advance premium tax credits, or subsidies.

Subsidies can reduce your premium, or even cover the payment entirely. Your eligibility for a subsidy depends on your income, while the exact amount of your subsidy is determined by the plans available in your area. Once you know your income, you can search for local plans to find your correct subsidy.

Subsidies are automatically applied to qualifying plans. There are no extra steps on your part to make them work. 

There are other ways to get payment help from nonprofits, local governments, and hospitals. And those with low monthly incomes may have easy access to Medicaid, which is another way to stay insured for minimal to no premiums.

Are Health Insurance Premiums Tax-Deductible?

Health insurance premiums that you pay are a deductible medical expense.

If you itemize your deductions (instead of taking the standard deduction), then the premiums you pay will generally count towards the medical expense deduction.

Employer-Sponsored: You can’t deduct premiums from your taxes if they’re paid by your employer. In other words, if your premium for workplace-sponsored coverage is $600, of which your employer pays $550 and you pay $50, then you can deduct that $50.

Premiums paid on your behalf can be costly. Since they’re not counted as part of your total income, they lower your overall tax obligation.

Self-Employed: If you’re self-employed, you can usually deduct your monthly premium from your taxes. You do not need to itemize your deductions to take advantage of this.

Examples of Premium Use

1. Jane, a single 30-year-old, joined a short-term health insurance plan with a $100 per month premium. She chose a $10,000 deductible plan, since the monthly premium for a $5,000 deductible plan would be higher.

Jane paid her premium each month, from July to December. She also racked up $250 in doctor bills while treating a sore throat. If Jane’s sore throat developed into a full-blown health issue, she would have been ready to fully use her plan. Jane paid $600 in premiums to remain insured.

2. Mike and Mary have an Affordable Care Act (ACA) marketplace silver plan from Molina. Mike and Mary are both covered, along with their two children. To insure 4 people, their total premium would be $1,200 per month.

Luckily, Mike and Mary qualify for monthly premium subsidies, since they make $65,000 per year. The government will send a check directly to their health insurance plan to cover some of their family’s premium.

Before Mike and Mary chose their plan, they learned that their final premiums would be $400 per month total after those automatic subsidies, instead of $1,200. It will cost $4,800 to keep their family of 4 on a health plan for the entire year.

What Happens if You Stop Paying Premiums?

There’s a grace period for those who don’t make premium payments.

ACA: If you have an ACA Marketplace plan, and you’ve already paid your first month’s premium, you’ll have 90 days to bring an overdue premium up to date.

Leaving your premium unpaid for more than 90 days will probably result in the company canceling your plan.

Paying a new premium does not restart the 90-day clock if your first missed premium remains unpaid. Your health insurer will retroactively cancel coverage to the day of your first missed premium.

If you’ve incurred medical bills that were paid by your insurer during that time, they would revert back to you.

If you leave your ACA plan after not paying premiums, you can’t use this reason to claim a Special Enrollment Period. You’ll also have to pay your first month’s premium to your next insurance company or plan before they cover you.

Medicare Part C and Part D: Grace periods must be at least 2 months long.

Unlike other consumer debt, unpaid health insurance premiums generally don’t go against your credit. They are rarely sent to collection agencies.

However, if you stop paying premiums, any claims your insurance paid during your grace period will be sent back to you. Medical bills frequently go to collections. These bills will impact your credit score less than other types of debt, but can cause serious problems that counteract the benefits of your insurance.

The premium of a health insurance plan refers to what you pay simply to stay enrolled, so insurance companies take this bill seriously.

Making Sense of Your Monthly Premium

Why do insurance plans use the word “premium” instead of “cost”? The true answer is probably lost to history, but the word premium has been used at least since insurance became commonplace in the 18th century. The word premium may be derived from Latin, in which it is roughly translated as “to pay before” something occurs.

Premiums are the monthly price that you pay to stay on health insurance. Premiums are the first number you see, but they’re not the only important thing. Go ahead and compare plans to find out more.

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