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Frequently asked questions about health insurance

What kind of health insurance should I get?
Like so many things when it comes to insurance, that depends. If your employer (or spouse's employer) offers a group plan that insures all of its employees, you can probably save a lot of money by taking part in it. If you don't have access to a group plan-or if the choices available through the group plan don't fit your needs-you will have to buy an individual policy that will probably cost a lot more. Group plans are not only cheaper, but many also let you choose from a range of services. You don't have to pay for coverage you don't want. Under a group plan, you're automatically eligible for coverage and cannot be dropped or charged more if you get sick. However, depending on the plan, the coverage may only reimburse you for a fraction of your actual medical bills. You may be limited as to which doctors you are allowed to visit, and your employer can raise your share of the premiums or even drop the plan anytime it wants. If you buy an individual plan, regulators in some states monitor price increases and might even have to approve them before they are passed to you. Many individual policies also allow you to visit any doctor or other specialist you like. However, the plans are generally much more expensive than group plans, the insurer itself has greater latitude to cancel your coverage, and some have relatively low maximum payout levels that could mean you'll run out of coverage if you're involved in a major accident or suffer a prolonged illness.

What types of health-related insurance should I avoid buying?
When buying health insurance, it's important to remember that you want to purchase the broadest coverage possible. A good, broad policy will cover just about every medical problem you encounter, regardless of how you get it or where. As a result, you can usually avoid "narrow" insurance policies that will pay only under unusual circumstances. According to Net Worth: Creating and Maximizing Wealth with the Internet (Jamsa Press, Las Vegas), here are some health-related policies you can probably live without: 1. One-disease insurance. Once you have broad coverage for every major health risk, any other coverage for a specific disease is redundant and a waste of money. 2. Accident insurance. These policies pay specific medical expenses resulting from an accident, rather than expenses resulting from illness. Again, this is redundant coverage because a standard health policy should cover health expenses resulting from either accidents or illnesses. 3. Health policies pitched by celebrities on TV, with premiums that appear to be unusually low. These policies usually have extremely long waiting periods before they cover any pre-existing conditions -- far longer than the waiting periods required by underwriters who don't have to pay for expensive advertisements and celebrity endorsements. 4. Policies sold through unsolicited mail that offer spectacularly low rates. Many of these policies also have unusually long waiting periods for pre-existing conditions. 5. Student health insurance. Chances are, your student is already covered under your family health policy until he or she is 18, or for as long as the student stays in school. Check your policy and call your agent. 6. Most indemnity policies. They pay you a flat rate, sometimes a mere $50, for every day you spend in the hospital. That's not very helpful, considering that the average daily rate at many hospitals now tops $500.

What is a major medical plan?
A major medical plan is a health insurance policy that provides comprehensive benefits for both hospital, physician and private nursing services. There is typically a deductible, ranging from $100 to $2,000 or more, and a co-insurance percentage, ranging from 10% to 50%. These two elements of the plan make up the insured's potential out-of-pocket expense, which is the portion of the cost of services that must be paid by the insured. For many policies, there is a cap on the annual out-of-pocket cost to the insured of $1,000 to $5,000. Employees may also be required to pay part of the premium on an employer-provided plan.

What is an HMO?
A growing number of insurance plans now contract with a health maintenance organization (HMO) to provide medical services to policyholders. The typical HMO provides a broad range of services. You (or your employer) pay a monthly premium for its coverage, as well as a small charge for each office visit. You're also usually covered for general physical exams and other types of services that many other insurance plans don't cover. There are no complicated claim forms to fill out. Many HMOs are big medical clinics, with doctors, nurses and therapists on staff. You typically have to choose a doctor from the organization's own roster, and the doctor will coordinate your medical treatment. HMOs tend to provide the least expensive medical coverage and a minimum of paper work. However, your choice of doctors may be limited. Getting an appointment to visit an HMO doctor can also take longer than getting an appointment with a doctor outside the plan, because each HMO physician is responsible for the care of literally hundreds or even thousands of patient-clients.

What are PPOs?
In a preferred provider organization (PPO), you get medical coverage that combines some of the cost-control advantages of an HMO with more of the choice associated with fee-for-service plans. You or your employer pay a monthly or quarterly premium to the health plan and, in exchange, you are covered for a broad range of medical services. Like an HMO, a PPO charges only a small fee for each office visit. There is no complicated paperwork to fill out. But in an HMO, your choices are usually restricted to a list of doctors that the organization has approved. In a PPO, the network of doctors is often much larger, and you're free to use a doctor outside the approved list as well. For this freedom, a PPO usually charges a bit more than an HMO. The cost of each office visit under a PPO may also be a higher than the cost of a visit to an HMO.

Should I get an HMO or a PPO?
Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are more similar than they are different. Both types of plans offer broad health care coverage, and their insurance premiums are relatively low. The cost of each office visit is nominal, and little or no paperwork is involved. The biggest difference between the two involves your choice of doctors. If you choose an HMO, you will have to select your doctor from a list of professionals the organization has chosen. If you select a PPO, you're free to continue using your family doctor or any other physician you choose. However, if the doctor or hospital you choose is not on the list of preferred providers, the plans generally cover only half of the total costs. If freedom of choice is especially important to you, you'll probably want to choose a PPO even though its premiums will be higher. But if you're looking for the least expensive coverage and don't insist on seeing a particular physician, an HMO would be your best bet.

What is daily hospitalization insurance?
Some insurance companies sell daily hospitalization insurance that pays a certain amount per day, usually $75 to $100. These policies usually are a bad idea and are certainly no substitute for a comprehensive health or major medical insurance policy. According to Eric Tyson's "Personal Finance for Dummie$" (IDG Books Worldwide Inc., Foster City, Calif.), "One day in the hospital can rack up a bill of several thousand dollars, so $100 can be gone in an hour or less! These policies don't offer coverage for the big ticket expenses. If you don't have a comprehensive health insurance policy, get it!" If you already have a major medical policy, it might seem useful to buy an in-hospital plan for those expenses not covered by your plan. However, a better approach might be to save an amount equal to the premium in a special account or mutual fund. Such funds could be used for any unforeseen expense.

What is a flexible spending account and are my contributions to it taxed?
Many employers now offer cafeteria plans. When the accounts in the plan are funded by the employee on a pretax basis, the accounts are called "flexible spending accounts". Opening one can slash your annual income tax bill and also help to reduce your medical expenses. According to "Get a Financial Life" by Beth Kobliner (Simon & Schuster), a flexible spending account is "an account in which you can put a fixed amount of your own money -- typically anywhere from a few dollars to an unlimited amount (depending on the employer's plan) -- to pay for specific medical expenses that aren't covered by health insurance. What makes an FSA different from a savings account is that you can put the money into the FSA on a pre-tax basis, and that money will never be taxed. FSA money is commonly used to pay for eyeglasses, contact lenses, allergy shots, dental care, prescription drugs, chiropractic sessions and any other unreimbursed medical expense. You can also use the money to pay the deductibles on your medical and dental plans."However, it's important to note that you can't use FSA money to pay for cosmetic surgery, electrolysis, health club memberships and similar expenses. Rules vary from company to company, so educate yourself before you sign up. One important thing to remember about flexible spending accounts is that these accounts are a ?use it? or ?lose it? type arrangement. If you place money into the account for medical expenses and do not have sufficient expenses to use the funds set aside, then the money reverts back to the employer. Also documentation must be furnished in order to be reimbursed from a flexible spending account.

Are there any drawbacks to establishing a flexible spending account for my medical expenses?
A flexible spending account lets you save money by making contributions on a pre-tax basis (which lowers the amount of earnings you owe taxes on) to pay for eyeglasses or other medical expenses not covered by your medical insurance. There are two drawbacks to an FSA: 1. If you don't use the money you put into the account during the year, you'll lose it. That's why you should put in only an amount you're certain to spend. 2. You are reducing your salary by the amount you contribute to the FSA. This reduction also reduces the amount your pay in Social Security tax and could, over time, diminish your Social Security benefit.

What is an in-hospital indemnity plan?
An in-hospital indemnity plan is a special type of health-insurance policy that pays a specific sum for each claim. This feature sets it apart from traditional payment-for-service health plans, in which payments are based on the actual cost of the medical services the policyholder receives. Indemnity plans are often much cheaper than payment-for-service plans, but they're not always a great bargain. That's because the set amount they'll pay on a claim -- say, a flat $125 per day for a hospital stay -- might pale in comparison to the actual cost of the services you receive. If the hospital charges $350 a day, you'll have to make up the difference. Because of this short-fall danger, such coverages should be used only as a supplement to help with deductibles and incidentals not covered by the primary plan.

Does health insurance include a dental plan?
Most health insurance plans don't automatically cover dental work. However, many health plans provide dental coverage for an additional fee. If you're looking for dental insurance, check with the company that provides your health insurance first. It may be cheaper to add the coverage to your existing health insurance policy than it would to purchase a separate dental policy from a different insurer.

What is a cafeteria (Section 125) plan?
A cafeteria plan, also known as a Section 125 plan, is an employee benefit plan governed by the provisions of Section 125 of the Internal Revenue Code. Its purpose is to provide a method for allowing the employee to choose from among a menu of choices (hence the name) those benefits the employee desires to utilize. The benefits may be fully or partially paid for by the employer. If the employee is required to pay for some or all of the benefits, he or she typically pays for them on a pre-tax basis. Employee paid pre-tax accounts are sometimes called "Flexible Spending Accounts" or "FSAs".

How does a cafeteria plan work?
In a cafeteria plan, the employee redirects a part of compensation to the various cafeteria plan accounts, which also has the effect of reducing taxable income by these amounts. The cafeteria plan accounts may include up to $50,000 in group term life insurance, child care reimbursement, medical expense reimbursement, medical, disability, vision, and dental insurance. If any contributions to the accounts are not used by the end of the plan year, the employee forfeits these unused amounts. Also, the employee cannot change the salary reductions during the plan year, except for changes in family status, birth, death, adoption, divorce, substantial change in insurance plans offered, or a change in job status of either spouse. For the medical expense reimbursement account, the employer is also at risk in a cafeteria plan. When an employee submits a voucher for an allowed medical expense, the employer must reimburse the expense even if the employee's account does not yet have a sufficient balance to reimburse the expense. If the employee terminates employment before he or she has had time to repay the employer's advance with plan contributions, the employer may lose the money advanced.

What does the Medical Information Bureau do?
Few people have ever heard of the Medical Information Bureau, but there's a good chance that it knows all about you. The MIB's main job is to catch people who falsify their insurance applications. If an insurer knows that you had heart surgery, it will likely report this to the bureau. If you later apply for medical or life insurance but fail to mention the operation, a quick check with the MIB can uncover it. The result: Your application may be declined, or the insurer may insist on a higher premium. The MIB is just one good reason not to lie on an insurance application. Even if an untruth slips through the cracks, the company that writes the policy can later cancel the agreement or even refuse to pay a claim if it can show the policy was issued under false pretenses.

What are open-enrollment periods for group health plans?
A few insurers, including health-care giants Blue Shield and Blue Cross, have open-enrollment periods for membership in group health plans for a month or two every year. During this time, plans will accept new customers who want to change insurers. Those who aren't insured at all also qualify for coverage during the open-enrollment period even though their application might be rejected at other times of the year. However, if an employee declined to participate when coverage was first offered, they can be charged higher rates if their health is poor.

How does COBRA affect my group insurance coverage when I leave a job?
If you leave your job, you can keep the insurance offered by the company's group plan from 18 to 36 months, depending on your situation. Your right to obtain this extended coverage is guaranteed by a federal law, the Consolidated Omnibus Budget Reconciliation Act of 1985, whose acronym is COBRA. Details vary from state to state, but COBRA generally allows you to purchase insurance through your employer's group plan for the same price the employer pays (plus 2% extra to cover administrative costs). If you're disabled, your COBRA rights last for 29 months. Buying COBRA insurance isn't always a great idea. If the company you work for offers a medical plan, it's probably paying at least part of your premiums for you. If you left the company, your employer would no longer subsidize your payments. So, under COBRA, you'd pay the full tab yourself, which can be hefty. You might want to exercise your COBRA rights and stay with the plan if you can't get coverage elsewhere, or if the coverage is the cheapest and best that you can obtain. You will need to shop the market to determine the best alternative.

If I retire at 63 1/2, will I be covered under COBRA until 65 when I'm eligible for Medicare?
COBRA enables workers who leave a company to avoid a lapse in coverage by continuing in their employer's health plan for a specified period, typically 18 months. The company must have 20 or more employees, and the worker cannot be terminated for misconduct. If your wife is covered under your employer's plan when you retire, she, too, will qualify for COBRA coverage.

What do I do if I'm getting divorced and I'm covered by my spouse's health insurance?
One key issue that divorcing couples must consider is how the separation will affect their health-insurance coverage. If one spouse is insured through the other spouse's employer (who employs more than 20 workers), COBRA will allow continued coverage for approximately 18 months in most cases. The coverage cost plus up to 2% will be billed to the discontinued spouse. According to "The New Century Family Money Book" (Dell Publishing), "Divorcing couples need to assure that they are adequately and continuously covered by health and medical insurance. The obligation to provide health insurance coverage is often included in the separation agreement." If the worker is fully insured under Social Security and the marriage lasted 10 years or longer, the ex-spouse is entitled to Medicare at age 65. An ex-spouse may also be eligible to collect full Social Security disability benefits if the worker-spouse is fully insured.

What is HIPAA and what are its benefits?
The Health Insurance Portability and Accountability Act (HIPAA) went into effect on July 1, 1997. It protects an insured person's insurability. Before this law, if an insured person lost insurance coverage for some reason, losing a job for example, he or she could be required to prove insurability before obtaining new coverage. For most people this wasn't a problem; however, for people with chronic health problems or whose health deteriorated while they were covered, it was a serious problem. Such people lived in constant fear of losing their jobs and thereby losing their health insurance. Now, if a person has been insured for the past 12 months, a new insurance company cannot refuse to cover the person and cannot impose preexisting conditions or a waiting period before providing coverage.

I'm a college student. Do I need to buy my own health insurance?
Many young adults don't realize that they still may be covered by their parents' health insurance after they go off to college. According to "Get a Financial Life" (Simon & Schuster), "If you're a student, you may still be covered by your parents' policy. Some employer-sponsored plans allow children of employees to be covered until age 23 if the children are still in school." If your parents receive notice that your coverage is about to lapse, the federal COBRA regulations allow them to extend it for up to 18 months.

Can I make penalty-free withdrawals from an IRA to buy medical insurance?
Losing your job is bad enough, but those problems can be compounded if your medical insurance disappears along with your paycheck. Since 1997, some workers who lose their jobs have been able to make penalty-free withdrawals from their Individual Retirement Account (IRA) to defray the cost of buying medical coverage. According to J.K. Lasser's "Your Income Tax" (Macmillan General Reference), "After 1996, unemployed individuals who have received unemployment benefits under federal or state law for at least 12 weeks may make penalty-free IRA withdrawals to the extent of medical insurance premiums paid during the year. The withdrawals may be made in the year the 12-week unemployment test is met, or in the following year. However, the penalty exception does not apply to distributions made more than 60 days after the individual returns to the work force." Self-employed persons -- who are ineligible for unemployment benefits -- now can also make penalty-free withdrawals from an IRA to pay their insurance premiums.

Why do I need medical-payments coverage under my automobile insurance policy?
The medical-payments coverage in a typical automobile insurance policy covers your medical and hospital bills (up to a certain dollar amount) if you or a passenger is injured in a car accident. You may need to buy the coverage, even if you have a separate health-insurance plan. According to "Get a Financial Life" (Simon & Schuster), "If you live in a no-fault state, you probably will be required to buy a minimum amount of medical payments coverage, typically called 'personal injury insurance' or 'no-fault insurance.' It covers your medical bills (and in some cases your loss of income if you are disabled) regardless of who is to blame for an accident. "If you live in a 'fault' state, you are usually not required to purchase medical payments coverage, but you may want to anyway. Accidents in which no one can be proven negligent won't be covered by liability insurance, and liability insurance will not cover your own injuries in accidents that you have caused." If you already have good health insurance, you won't necessarily need medical payments insurance to cover your own medical bills. But you may want to consider purchasing it if you ever have passengers in your car.

What does long-term care cover?
A typical long-term care policy covers extended care regardless of whether the care is medically related to a specific illness or injury. According to the National Network of Estate Planners in Denver, a typical policy will pay for care "provided either in a nursing care facility or at home. In some cases, long-term care also extends to adult day-care centers and other community-based care facilities." It is very important that you know which medical and ancillary expenses will be covered, because you'll want to choose a policy that reimburses you for expenses rather than one that pays you a flat daily rate (an indemnity policy). The following expenses should be explicitly listed in your policy contract as covered: respite care, home modification, hospice care, caregiver training, professional health-care services, therapeutic devices, and personal care adviser and bed-registration fees if you are moving to a nursing home.

Is there any rule of thumb to determine if I should buy long-term care insurance?
Long-term care insurance can easily cost more than $1,000 a year, which is one reason some experts say you shouldn't buy the coverage unless you already have other types of insurance and cash to spare. According to the National Network of Estate Planners, Denver, Colo., "Consumer and financial experts generally agree that long-term care insurance is a bad investment . . . unless you will be able to pay the monthly premium with no more than 5% of your income. If you can, and in addition to your home, you expect to have over $10,000 in assets and over $30,000 per year in income when you reach your 80s, then a long-term care policy with high benefits and compounded inflation protection might be a reasonable investment if you can find and qualify for a good one."

If I'm in my 30s or 40s, why should I be concerned about long-term care?
If you're under 55, you can't be blamed if you consider purchasing a long-term care policy a waste of money. After all, it may be a long time before you need long-term hospitalization or nursing care. But just as with life insurance, it's never too early to think about buying long-term care coverage. Such insurance is much cheaper when you're young because the insurer knows it's unlikely you'll need to be hospitalized any time soon. For example, if you sign up when you're 50, your annual premiums will be about 30% as much as those for a 75-year old, and you will be covered for 25 years more. In addition, it's much easier to qualify for long-term care insurance when you are young. All the application forms ask you about a host of medical conditions you may have experienced: If you answer "yes" to any one of them, your application may be rejected. But since most of those conditions develop only as you grow older, you probably haven't had them. Long-term care policies are good investments for some people and poor investments for others. Being young doesn't automatically exempt you from deciding whether to buy such a policy.

From whom should I buy long-term care coverage?
If you decide to buy long-term care insurance, choose an insurance company that will be financially strong enough to pay any claim you might make. Stick to plans offered by insurers who get the top financial ratings from independent rating firms. You can find ratings from both Standard & Poor's and Duff & Phelps on the Insurance News Network Web site. You also want to be sure that you're comfortable with the person who actually sells you the plan. According to the National Network of Estate Planners, Denver, "You should develop a reasonably high trust level with the person who presents a coverage plan to you. You should feel that you have the ability to openly communicate your concerns and receive accurate answers to your questions. It would be beneficial for you to buy from a representative of an organization that can provide current and future service to you as questions or needs arise." Another reason to build a lasting relationship with the person who sold you the plan is that you should review your coverage with the agent at least once a year. If you're comfortable with the person, the review process will go more smoothly.

What is the typical premium for long-term care insurance?
A typical policy begins paying benefits 60 days after the onset of an illness or injury that requires long-term care. Benefits may last for up to 50 months and are increased 5% annually to keep pace with inflation. While there are a lot of additional variables that can affect premium rates, the biggest is one's age when the insurance is purchased. Typical current preferred rates are: Age Annual Premium
40 $240
50 $460
60 $1,000
65 $1,550
75 $3,300
79 $6,150
A preferred rate is typically a 25% discount from a standard rate. If a couple applies jointly, many companies will automatically grant them a preferred rate. Single applicants can typically qualify for a preferred rate if they haven't smoked in the five years preceding the application, drive at least 1,500 miles per year and work or volunteer outside the home for at least 8 hours per week. The above characteristics represent common provisions, benefits and rating procedures in the industry. However, keep in mind that each company will have its own unique policy and rates. Just make sure you understand what you're buying and how much your are paying. Talk to more than one agent or, for a small fee, a financial planner will assist you.

Do I need a waiver of premium provision in my long-term care plan?
Nearly all long-term care insurance policies contain a provision that waives the policy's premiums if you are eligible to collect benefits. After all, if you're placed in a long-term care facility, you're probably going to need every cent that you can save and you certainly won't be able to go out and work. Be sure that any policy you purchase has such a provision. But also make sure you understand how the provision works. Some insurers will waive the premiums on the first day that benefits become payable. However, others require that benefits be paid for a period of 90 days before premiums will be waived.

Do I need an inflation-protection provision in the contract for my long-term care insurance?
Long-term care insurance is expensive, with a typical policy for people in their 60s often costing more than $1,000 a year. But if you've decided to purchase such coverage anyway, it's important to spend a little extra money to ensure that the benefits payable under the policy will rise each year to keep pace with inflation. According to the National Network of Estate Planners, Denver, Colo., "If, as is often the case, you do not collect benefits for 10 to 30 years after you buy a policy, a benefit amount that now seems reasonable will be woefully inadequate when you actually get the care. It is essential, then, that your policy provides automatic inflation protection -- not merely the option to buy added coverage. And the best inflation protection is compounded-meaning that the percentage increase is based on the immediately previous, not the original benefit amount. Good inflation protection raises premiums, but without it, the policy may be a total waste."

If my spouse and I both purchase long-term care insurance, can we get a discount on our premiums?
If you're married and both you and your spouse decide to buy a long-term health care policy from the same insurer, you could qualify for a hefty discount on your annual premiums. According to the National Network of Estate Planners in Denver, "most of the quality long-term care insurance providers allow a discount when both spouses apply for a long-term care policy. The amount of the discount is typically from 10% to 15%. The insurance companies give this discount because spouses living together provide some custodial care that would otherwise be provided by outside sources. Companies also find that spouses living together delay their entrance into a nursing care facility, preferring instead to be at home with their spouse."

How will my insurer determine whether I'm eligible for benefits under my long-term health-care insurance?
If you have long-term health care insurance and make a claim, your insurer will likely look at six "benefit triggers" to determine if you can collect. According to the National Network of Estate Planners, Denver, "The measurement devices, or 'benefit triggers,' are known as 'activities of daily living.' These activities are used to determine whether a person is capable of living independently or is dependent in some areas. There are six commonly recognized activities: Eating, using the toilet, continence, bathing, dressing [and] moving about." Typically, a patient must be unable to perform two or three of those six functions in order to qualify for benefits under the policy.