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Individual Health Insurance

As its name implies, individual health insurance covers only your (and your family's) medical expenses. Unlike group insurance, individual health insurance is purchased directly from an insurance company. When you apply, you're asked a series of medical questions and possibly given a physical exam to determine how much risk you present. Your risk potential determines whether you qualify for the insurance and how much it will cost.

Each state has its own regulations regarding insurance products, including criteria for acceptance or rejection of applications by the insurance companies. Ask your insurance agent or call your appropriate state department.

Individual mandate starting in 2014

The Patient Protection and Affordable Care Act (PPACA), passed in 2010, imposes an individual mandate or directive that, starting in 2014, all U.S. citizens and legal residents must have health insurance coverage or a penalty will apply. An individual is also responsible for providing insurance both for himself/herself and any dependent family members. This mandate can be satisfied with health insurance obtained through an employer plan, a spouse?s employer-provided plan, an existing insurance policy, or an "exchange" that will be created by 2014 (see below for more information). Coverage obtained through retiree plans, veterans programs, Medicare, Medicaid, SCHIP (Children?s Health Insurance Program), and available to active duty military will also satisfy the mandate as will other designated types of government-sponsored health plans. Exceptions may be granted for financial hardship, religious objections, American Indians, undocumented immigrants, individuals without coverage less then three months, incarcerated individuals, if the lowest cost plan is 8 percent of an individual's income, and for those with incomes below the tax filing threshold for taxpayers under 65.If you do not have qualifying insurance, you will pay a tax penalty of the greater of $695 per year up to a maximum of three times that amount per family, or 2.5 percent of household income. The phase in for the penalty is as follows: 2014, flat fee of $95 or 1.0 percent of taxable income; 2015, flat fee of $325.00 or 2 percent of taxable income; 2016, flat fee of $695 or 2.5 percent of taxable income. After 2016, the penalty will be increased annually by a cost-of-living adjustment.

Getting covered

Most people purchase individual health insurance coverage through traditional insurers. Some managed health-care systems also provide individual coverage; in fact, some states require health maintenance organizations to offer it during a special open enrollment period each year.

To get individual health insurance, you can either contact the insurer directly or get in touch with your insurance agent. To make sure you're getting the best coverage for your money, get quotes from several insurance companies before you choose a policy.

Before the insurer issues you a policy, it will want to know everything about your personal health history. It's unwise to try to hide a pre-existing condition, since many insurers use information from the Medical Information Bureau to determine whether you're insurable. If the insurer doesn't want to cover a particular health condition, you might still be able to get a policy with an exclusion rider. But if the insurer later discovers that you withheld information to get the insurance, your coverage could be rescinded back to your application date, so you will have no coverage.

Note: The PPACA authorizes the creation of state-based American Health Benefit Exchanges and Small Business Health Options Program (SHOP) Exchanges. These plans will be administered by a governmental agency or nonprofit entity that will be established by the individual states. These state-based exchanges will be established by 2014.

The benefits of individual coverage

In the event of illness or injury, individual coverage is infinitely better than being uninsured. Although you may think that you can do without health insurance, you are taking a major risk if you choose not to get it. An unexpected illness or serious injury can put you and your family in financial peril. Remember that once you develop symptoms, it's too late to apply for coverage.

With individual health insurance, you're directly in control of your own policy. You may be able to negotiate to have certain provisions included or excluded, and you can choose your deductible amount and co-payment percentage. Keep in mind, however, that your choices will affect your premiums.

The disadvantages of individual coverage

When you purchase individual health insurance, you're responsible for 100 percent of the cost. Individual insurance often doesn't provide as much coverage as group insurance in the same price range. Moreover, to make up for the insurer's increased risk exposure, individual insurance is more expensive than group insurance.

Individual health insurance coverage is much easier to come by when you're healthy. If you're already sick or have a history of health problems, you may find it difficult to obtain coverage. Group insurance, by contrast, is usually available without taking a medical examination or answering health questions. And, beginning in 2014, the PPACA requires that all health insurers must sell coverage to everyone who applies, regardless of their medical history or health status, and plans cannot exclude coverage for those medical conditions.

What you should look for in an individual policy

Try to find a policy with a guaranteed renewability provision. The guaranteed renewability provision means that the insurer can't cancel your coverage if you become ill. As long as you continue paying your premiums, your insurance coverage continues. Your premiums may go up over the years, but they will rise for all policies in your class, not just for your policy alone.

Be sure to check what's covered and when. Major medical coverage, which covers all hospital costs including rooms, emergency-room care, anesthesia, tests, X rays, and drugs, is preferable to hospital-surgical coverage, which covers only hospital and surgical services. Most insurance companies impose a waiting period before they'll cover pre-existing conditions. The shorter this period, the better. Three months to one year is standard; anything over a year is extremely undesirable. Most policies do cover outpatient treatment, although cosmetic and other truly elective surgeries are rarely covered. The easiest way to check what's covered is to look at what's not covered, by reading the Exclusions and Limitations section. You'll also want to check with your state insurance agency, since some states require nongroup insurance coverage to comply with a standard set of benefits.

You'll want to find a policy with the highest lifetime payout possible. Policies with unlimited payouts are less common these days, but anything less than $1 million may be insufficient to cover you in the event of a catastrophic illness.

You'll also need to choose a limit for your out-of-pocket costs. Lower deductibles and co-payments mean that your costs will be lower if you actually do get sick, but you'll pay dearly for this protection. By agreeing to higher deductibles and co-payments, you can cut your insurance premiums dramatically. As long as you retain a reasonable out-of-pocket maximum, you shouldn't have to worry about your medical costs getting out of hand.

Finally, look for an insurer that's financially stable--one with an "A" or "A+" rating from A. M. Best, Moody's, or Standard & Poor's. It does you no good to have guaranteed renewable insurance if your insurance company goes belly-up.

Note: According to the PPACA, passed in 2010, effective June 1, 2014 all policies must cover "essential health benefits." These benefits include the following: (1) ambulatory patient services. (2) emergency services. (3) hospitalization. (4) maternity and newborn care. (5) mental health and substance use disorder services, including behavioral health treatment, (6) rehabilitative and habilitative services and devices, (7) prescription drugs, (8) laboratory services, (9) preventive and wellness services and chronic disease management, and (10) pediatric services, including oral and vision care.