Health Insurance Terms Explained: Premiums, Deductibles, Copays and More

Health insurance can feel like it comes with its own language. Premiums, deductibles, copays, coinsurance, networks and out-of-pocket maximums can be confusing, yet understanding these terms is essential for choosing the right plan, budgeting for health care and avoiding surprise bills. Here’s a plain-English guide to the most important health insurance terms.

Premium

Your premium is the amount you pay each month to have health insurance coverage, whether or not you use any medical services. If you get insurance through your employer, your share of the premium is usually deducted from your paycheck, and your employer often pays a portion. If you buy insurance on your own, you pay the premium directly to the insurer.

Premiums are just one part of your total health care costs. A plan with a low premium might have higher costs when you actually use care, and vice versa.

Deductible

Your deductible is the amount you pay for covered health care services before your insurance plan starts sharing costs. For example, if your plan has a $1,500 deductible, you pay the first $1,500 of covered services yourself each plan year.

However, many plans cover some services before you meet your deductible. Under the Affordable Care Act, most plans must cover certain preventive services, such as annual checkups, vaccinations and certain screenings, without charging you anything when you use in-network providers, even if you haven’t met your deductible. Some plans also apply copays for doctor visits or prescriptions before the deductible.

Family plans often have both individual and family deductibles.

Copay

A copay, or copayment, is a fixed amount you pay for a specific covered service, such as $30 for a doctor visit, $50 for a specialist visit or $10 for a generic prescription. Copays are predictable, making it easier to budget for routine care. Depending on your plan, copays may apply before or after you meet your deductible.

Coinsurance

Coinsurance is your percentage share of the costs of a covered service after you’ve met your deductible. For example, if your plan has 20% coinsurance, you pay 20% of the cost of covered services, and your insurance pays the remaining 80%, until you reach your out-of-pocket maximum.

Coinsurance can make costs less predictable than copays, since your share depends on the total cost of the service.

Out-of-pocket maximum

The out-of-pocket maximum, sometimes called the out-of-pocket limit, is the most you’ll pay for covered, in-network health care in a plan year. It includes your deductible, copays and coinsurance, but generally not your premiums or costs for services your plan doesn’t cover.

Once you reach your out-of-pocket maximum, your plan pays 100% of covered, in-network services for the rest of the plan year. This limit provides important financial protection against very high medical costs. The Affordable Care Act sets annual limits on out-of-pocket maximums for most plans.

Networks

Health insurance plans contract with networks of doctors, hospitals, pharmacies and other providers who agree to accept negotiated rates. Staying in-network usually costs much less than going out-of-network. Some plans don’t cover out-of-network care at all except in emergencies.

Common plan types differ in how they handle networks. Health maintenance organizations, or HMOs, often require you to use in-network providers and may require referrals from a primary care doctor to see specialists. HMOs typically have lower premiums and out-of-pocket costs.

Preferred provider organizations, or PPOs, usually offer more flexibility, letting you see specialists without referrals and providing some coverage for out-of-network care, generally at higher cost. Exclusive provider organizations, or EPOs, typically cover only in-network care but may not require referrals. Point-of-service plans, or POS plans, combine features of HMOs and PPOs.

The federal No Surprises Act protects many people from surprise bills for certain out-of-network emergency care and for some services from out-of-network providers at in-network facilities.

Other important terms

A formulary is the list of prescription drugs covered by your plan, often organized into tiers with different costs. Prior authorization is approval your insurer may require before covering certain services or medications. An explanation of benefits, or EOB, is a statement from your insurer showing what was billed, what the plan paid and what you owe. It isn’t a bill but is useful for checking medical bills for errors.

A high-deductible health plan, or HDHP, has a higher deductible and typically lower premiums, and may be eligible for a health savings account, which lets you save for medical expenses with tax advantages.

Choosing a plan

When comparing health insurance plans, look at total yearly costs, not just premiums. Estimate your annual premiums plus expected out-of-pocket costs based on how you typically use health care.

Consider how often you see doctors, any ongoing prescriptions, planned procedures and whether your preferred doctors and hospitals are in-network. Someone who rarely uses health care might choose a plan with lower premiums and a higher deductible, while someone with ongoing health needs might save with a plan that has higher premiums but lower out-of-pocket costs.

Review the plan’s Summary of Benefits and Coverage, a standardized document that makes it easier to compare plans side by side.

Understanding these terms gives you the confidence to choose the right plan, anticipate costs and get the most from your health insurance.