What Is a Health Insurance Premium?

Health Insurance Premium Explained in Less Than 5 Minutes

A doctor talks to a patient.
•••

Cavan Images / Getty Images

A health insurance premium is the monthly amount you or your employer pays to an insurance company to keep your health insurance active. Insurance companies use the premiums collected from policyholders to settle medical claims and offset some of their administrative expenses.

Learn more about what health insurance premiums are, how they work, and what they mean for your health insurance coverage.

Definition and Examples of a Health Insurance Premium

A health insurance premium is an amount you pay each month to keep your health insurance policy in force.

For example, if you want to enroll in Medicare Part B, you will pay at least $148.50 per month as a premium cost. That premium could be higher depending on your income. If you’re covered by your employer’s health plan, a portion of the premium may be deducted from your paycheck (your employer covers the rest).

There are different ways to pay premiums to insurance companies, so you must follow your insurer’s instructions closely. Take note of the premium due date and pay your premium by then. If you skip premium payments, your policy could ultimately lapse—meaning you lose your health coverage.

To ensure you get value for your premium payments, the Affordable Care Act protects consumers from unreasonable health insurance premium increases by most insurance companies. Regulators must assess any large proposed premium increases to ensure they are based on solid evidence and reasonable cost assumptions. 

Premiums are just one cost you pay to receive medical care. You’ll also pay a portion of shared costs in the form of deductibles, coinsurance, and copayments.

How a Health Insurance Premium Works

A health insurance premium is the monthly fee you pay to an insurance company to have health coverage. 

When setting your premium, insurance companies may consider factors such as your age, where you live, whether or not you smoke or use tobacco products, and whether coverage is for an individual or family. 

If you get health insurance through an employer, your premium is based on the whole group. Your employer may pay all or a portion of your premiums. 

Premiums for individual plans are typically locked in for one year, but rates may increase when you renew coverage, as a result of your age and higher costs of health care.

The Affordable Care Act requires that insurance companies provide easy-to-understand information about their reasons for significant premium hikes. Companies must also justify any significant premium increases and make them available to the public (by posting on their websites).

Other Cost-Sharing Mechanisms

The monthly premium is one of several “out of pocket” expenses that add to the total cost of medical care. Other common out-of-pocket costs include:

  • Deductible: The amount you must pay toward covered health care expenses before your insurance coverage kicks in.
  • Copayment: A fixed amount you pay after meeting your deductible for expenses at the time of service, such as a doctor’s office visit.
  • Coinsurance: The percentage of covered health services you pay even after meeting your deductible.

Generally, health plans with lower premiums have higher deductibles and vice versa. 

Once you reach the out-of-pocket maximum, your insurance company pays for all covered services.

If you have a marketplace plan, you may be able to get help lowering the monthly payment for a health plan through a premium tax credit.

You’re eligible for premium tax credits if you buy a plan through the Health Insurance Marketplace or your state marketplace and if your income is between 100% and 400% of the federal poverty level. You can use none, a portion, or your entire premium tax credit in advance to lower your premium.

What It Means for Your Job-Based Health Insurance

The Affordable Care Act requires that employers who have 50 or more full-time workers offer health insurance that meets minimum value and affordability requirements.

Unlike individual insurance plans where you pay the full premium bill, job-based health insurance premiums are shared between you and your employer. However, your share of the monthly premium for self-only coverage should not exceed 9.61% of your family income if your employer-sponsored plan complies with the ACA requirements.

You may qualify for a premium tax credit and other forms of financial assistance if your job-based insurance doesn’t meet the minimum standards for affordability and coverage set by the ACA.

The premiums your employer pays for health insurance are exempt from federal income and payroll taxes. Also, your share of the premium you pay is also typically excluded from taxable income. This tax subsidy helps reduce the after-tax cost of employer-sponsored health insurance.

Individuals and families may also qualify for health insurance premium assistance on job-based insurance when at least one member is enrolled in Medicaid.

Key Takeaways

  • A health insurance premium is the amount you pay each month toward your health insurance plan, regardless of whether you use any health care.
  • Health plans with a higher premium generally have a lower deductible while those with a lower premium often carry a higher deductible.
  • Insurance companies can’t generally make unreasonable hikes on insurance premiums, and proposed rate increases must be reviewed by either the state or federal government.
  • Premiums for job-based health insurance plans are shared between the employer and employee.