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If you lose your job, start a business, retire early or work in a job without health insurance, there's a good chance you'll be shopping for health insurance in what's called the individual market.
Individual policies can cover one person (called "self-only coverage") or a family. Because you are not buying insurance through a group, which spreads the costs among more people, you'll likely find individual health insurance policies covering substantially less than health plans in the group market, and dollar-to-dollar health insurance will cost you more in the individual market.
Still, if the individual market is your only option, it's important to buy health insurance to protect you and your family from financial ruin if you get sick or have an accident. But first, it's important to know what you can expect when shopping for insurance in the individual market.
Below are some things you'll need to think about and some key questions to ask.
Calculate all your health costs
Very low premiums may be attractive at first, but what really matters is the combination of premium plus your likely out-of-pocket spending on health care below the deductible. Remember: you pay all of those costs from your own pocket. So while it's tempting, don't shop on premium alone.
Add up all of your potential costs under a policy, including deductibles, co-payments, co-insurance and any other cost-sharing obligations. Medical debt causes a big share of bankruptcies, even for people who have insurance. The problem in those cases is mostly due to a lack of insurance protection when a serious health condition strikes.
Understand what a policy covers and what it doesn't. Many individual policies sold do not offer comprehensive protection.
Be aware that your health matters
Your health dictates whether you can buy individual insurance and the price you'll pay. In most states, insurers consider your current health status, medical history, age, gender, residence and occupation before they decide whether to offer you a policy.
If you have or had a serious health condition — cancer or diabetes, for example — an insurer can reject you based on pre-existing conditions. If you suffer from less severe conditions, such as hypertension or knee problems, an insurer may offer you a policy with a temporary or permanent exclusion rider, meaning your specific condition won't be covered. Some insurers may cover the condition but boost the price of the policy. Typically, the young and healthy find the best deals on individual coverage, while older and sicker individuals pay much more.
Example: Two women, both age 38, find the same health plan, and apply as individuals for coverage. One woman in very good health gets a policy and pays $220 a month. The other woman, who suffers hay fever and minor ailments, may get the same policy but be charged 50% more. Meanwhile, a man age 54 in good health is more likely to be stricken by illness than a man age 25. As a result, the older man pays substantially more than the younger man for the same policy.
Read the fine print
Shoppers in the individual market don't receive the employer subsidies that are common in the group market, nor do they get the benefits of a larger pool of people needed for an insurer to spread its risk and offer better rates. As a result, buying insurance in the individual market can be harder on your wallet.
But there are affordable policies in the individual market. Products can range in price from about $1,000 a year to more than $10,000, even for healthy individuals, depending on the state, a person's age, and the specific benefits in the insurance policy. There are a wide range of products in the individual market, from catastrophic-only coverage to comprehensive health plans to products that cover only a specific disease, like cancer. What's important is that you look carefully at what each policy covers and what it doesn't.
Note that where you live matters when you're shopping for individual health insurance because each state has different rules. Buying coverage in the individual market is easier in some states — including Maine, Massachusetts, New Jersey, New York and Vermont — because of protections afforded residents allowing them a right to buy health insurance, regardless of their health condition.
Look for "guaranteed renewable"
"Guaranteed renewable" means that you have the right to renew the policy annually. If a policy is not guaranteed renewable, you could lose coverage at the end of the policy year if you get sick or get in an accident.
Some policies sold in the individual market, such as short-term policies, are not guaranteed renewable. These non-comprehensive policies are written for short durations, such as six months, and are designed to provide minimal protection during life's transitions, between college graduation and a first job, for example. If you get sick, don't expect to get renewed. You’ll also find it harder to obtain permanent coverage.
Even if a policy is guaranteed renewable in the individual market — and many are — expect your costs to rise each year. In some years, you'll find the price jump significantly, depending on a policy's renewal rules. Some plans will increase rates annually based on the how long you've held the policy, or on their experience with the group of people who bought the policy when you did. If that group of people is sicker than average, the health plan will raise its premiums to cover those costs. When you shop for a plan, it's important to ask what methodology the company uses to calculate yearly premium increases.
Examine all your options
When it comes to health insurance, employer-based or group coverage is almost always your best bet. If that's not an option through your or your spouse's employment, consider these other options before you apply for insurance in the individual market:
- You may be able to get COBRA benefits if you leave a job where you received health benefits. The federal law allows you to continue in your employer's group plan for 18 months (in some cases longer), and may be a good option in transitions between group health insurance or while you search for the right individual insurance policy. Remember, you'll have to pay the full cost.
- Another federal law, HIPAA , helps those who don't qualify for COBRA and those who extend COBRA benefits to get coverage in the individual market despite illness.
- Self-employment offers some relief in two ways:
- About a dozen states allow the self-employed to buy into the small group market, which affords more protections and cheaper rates.
- People who are self-employed receive tax advantages related to their insurance, and even to medical purchases, that others in the individual market don't receive.
- Association coverage may allow you to buy coverage at cheaper rates through a professional organization, for example, or other groups. There have been some fraudulent schemes involving association coverage, but plenty of reputable association coverage options are available. Carefully check the credentials of any association whose policy you want to purchase.
Questions to ask
If you choose the individual market, it's important to understand how any specific policy works and what it covers. Individual policies generally don't offer the robust coverage found in group policies. Ask an insurance company or broker the following questions:
- What services are covered? Individual policies typically aren't as comprehensive as group insurance and often do not include coverage for rehabilitation, mental health/substance abuse services and eye care. Many policies include a limited prescription drug benefit or no prescription benefit at all. Some insurers, however, offer these and other benefits for purchase in the form of separate riders.
- Are there limits on coverage? Some policies place limits on the amount the insurer will pay for a covered service — $500 for prescription drugs, a certain amount for chemotherapy or five doctor visits annually, for example.
- Is there a limit on the amount I pay out-of-pocket? Your financial obligation may be limited under some policies to a certain threshold, perhaps $5,000 in out-of-pocket spending a year. Depending on the policy, you may have a higher (or lower) out-of-pocket maximum. Moreover, many policies come with lifetime limits, $1 million for example. If you suffer serious illness, the lifetime limits could become an issue.
- Does the advertised premium apply to me? In group insurance, the premium your health plan or employer cites before you sign up won't change. When shopping for individual coverage, keep in mind that the prices quoted based on your age and where you live are the best prices. If you are in excellent health, that's what you can expect to pay. However, after the insurance company has learned more about your health status, your premium could jump significantly.
- Can I add a spouse if I get married or a child if I give birth or adopt? Some plans will require you to re-apply for coverage — including new medical underwriting — if your family situation changes. Ask if there are circumstances under which you would need to re-apply.
- What does the insurance company say about annual or any other rate increases? On what basis will the company raise the monthly premium you pay?