There are so many different types of insurance we have to decide if we need or don’t need: auto insurance, disability insurance, cancer insurance, accident insurance...the list goes on. But what about life insurance? There are so many television commercials—it must be something you need. And the same goes for health insurance—it feels like it’s mandatory when you see some of the medical bills people face.
Jump ahead to these sections:
- Overview: Health Insurance vs. Life Insurance
- Should You Get Health Insurance, Life Insurance, Both, or Neither?
Many financial planners and insurance professionals will tell you that life and health insurance are the two-must have types of coverage out of all of the different varieties of insurance, followed closely by disability insurance. What makes them so important? What is the best type of health insurance—PPO, HMO, or indemnity plan? Should I buy term life insurance or whole life insurance?
This article will answer those questions and more. Let’s zero in on life and health insurance. We’ll start by looking at the characteristics and benefits of each.
Overview: Health Insurance vs. Life Insurance
Health insurance and life insurance share many of the same characteristics: underwriting, premiums, insured individuals, claims payments, and more. But, they have distinctly different purposes and benefits. Here is an introduction and overview of each.
Health insurance
Health insurance is designed to pay hospitals and doctors for any medical expenses you incur with them. Depending on the type of coverage you select, your health insurance may cover:
- Doctor’s appointments
- Prescription medication
- Home health care
- Hospital expenses
- Ambulance services
- Overseas medical costs
- Physical therapy
- Chiropractic treatment
- Mental health treatment
There are many different types of health insurance to choose from, of which the most common are the HMO, PPO, and indemnity plan.
HMO is an acronym for Health Maintenance Organization. HMOs have a network of health care providers that you must use. If you don’t use one of the HMO’s providers, you usually won’t have those medical bills paid when you submit a claim.
Many people lean towards HMOs because of their lower premiums and low out-of-pocket costs. For example, many doctors in an HMO network will charge small office visit copays, like $15 for an office visit for a general practitioner and $30 for a specialist. Emergency room visit copays are also lower than other types of plans and are generally in the $75 -$100 per visit range.
PPO is an acronym for Preferred Provider Organization. PPOs are similar to HMOs in that they both have provider networks for hospitals and doctors that you have to utilize to get benefits paid, but PPOs typically have a much more comprehensive selection of providers than HMOs. The copays for both are similar, but a PPO plan is generally more expensive than an HMO.
The reason PPOs are more expensive than HMOs can be attributed to the compensation the medical providers receive from the health insurance company. For example, doctors in a PPO plan are paid per visit by the insurance company, whereas doctors in an HMO plan are paid a monthly membership fee whether or not they see an insured person.
Many people are willing to pay higher premiums for PPOs because their doctors are on the provider list of more PPOs and many people are not ready to switch to an HMO doctor they don’t know.
Indemnity plans, also known as 80/20 plans, are typically the most expensive of the three types of plans described here. This is because they charge an insured a deductible before any benefits are paid, which can range from $500 to $10,000 (the higher the deductible, the lower the monthly premium). After the deductible is met, the insured is responsible for a percentage of the charges, and the insurance company pays the balance.
For example, an insured with an 80/20 plan with a $500 deductible would pay the first $500 of medical treatment charges, then 20% up to a maximum out-of-pocket amount. Once the insured has reached that maximum, the insurance company will pay 100% of the charges for the remainder of the calendar year.
Life insurance
Life insurance is an insurance product that pays a death benefit to a beneficiary named in the policy when the insured person dies. It is a contract between the policy owner and the insurance company that ensures that if all contract terms are honored by the policy owner, the life insurance company must pay an agreed-upon amount of money to the beneficiary.
For example, Gene agrees to pay Executive Life a $100 per month premium in exchange for Executive Life agreeing to pay Gene’s wife $50,000 when Gene dies. No matter how many months Gene paid the monthly premium, his wife will receive the death benefit as long as premiums paid were up-to-date and no other policy provisions had been violated by Gene. For example, no death benefit is paid for death by suicide in the policy’s first two years of being in-force but it is paid after that time.
There are also many types of life insurance to choose from, with the two most popular being term life insurance and permanent life insurance.
- Term life insurance is the type of life insurance most often recommended by financial planners and experts. Term life insures the life of an individual for a set period, or term, of years. The most common number of years with a term life policy is 1, 10, 20, or 30 years.
- Permanent life insurance policies often sold by insurance companies are either whole life insurance, universal life insurance, or variable universal life insurance. These types of policies have two components that a policy owner pays for: life insurance and a savings element, often referred to as “cash value.”
A term life insurance policy has no cash value component. It expires without value once the term length of the policy expires.
Finding the best life insurance for your situation will require some diligence, but a professional life insurance agent or financial planner will help.
Here’s a breakdown of life insurance vs. health insurance:
|
Life Insurance |
Health Insurance |
|
|
Coverage |
A contract in which the insurance company agrees to pay the insured person’s nominee a fixed amount if the insured person dies. |
A contract in which the insurance company agrees to pay for covered medical and hospital expenses and the insured person agrees to pay a fixed premium. Some health plans may include prescription drug coverage and/or health-related items and services. |
|
Benefit pay-out |
Benefit is only payable if the policyholder dies. |
Benefit is payable when covered medical expenses occur; the policyholder may be responsible for cost-sharing payment, such as deductibles, coinsurance, or copayment amounts. |
|
Term of coverage |
Usually longer terms of coverage, such as 10, 20, 30 or more years. |
Usually shorter terms of coverage, such as one year. |
|
When to buy |
Varies by person, but most people purchase life insurance when someone else depends on their income (e.g., a spouse, partner, and/or children). |
Most people need to purchase health insurance if they’re not able to participate in an employer’s group health insurance and do not qualify for a government health program. To purchase ACA health insurance from your state’s marketplace, you must apply during specific times of the year (usually October through December) or within 60 days of a special qualifying event, such as a divorce or loss of job. You can purchase health insurance privately any time. |
|
Where to buy |
Most people purchase life insurance by selecting a life insurance company that has the policy they desire and work with an insurance agent or broker to purchase the policy and any desired riders. |
You can purchase individual or family health insurance online at eHealth. If you’re a small business owner, eHealth can also help you find a small business health insurance plan. Using the eHealth plan finder, you’ll have access to health insurance plans on and off the marketplace. |
Should You Get Health Insurance, Life Insurance, Both, or Neither?
Though it’s a matter of personal preference, almost all financial advisors and planners will tell you that to protect yourself and your family financially, you should always have both types of coverage in place.
It’s no secret that hospital bills can soar into the millions of dollars for a serious illness. Even having an emergency room bill of $2,500 is a financial hardship for many families. Health insurance is not inexpensive, but it is a lot less expensive than paying for most medical services out-of-pocket.
Many individuals and families are enrolling in High Deductible Health Plans (HDHP) with deductibles as high as $5,000 or $10,000, particularly those who rarely use their health insurance and can afford to pay cash for minor medical expenses, like doctor’s office visits.
Life insurance is recommended for anyone who has other people dependent on them financially, such as a spouse and/or children. Surviving family members often need a lump sum of money to replace the income of the insured person who passed away, to pay off a mortgage, to pay for children’s college educations, to pay for a funeral with life insurance, and many other vital purposes.
Many insurance agents and financial advisors are licensed to sell both life and health insurance to help their clients with both types of protection. Independent agents are a good source of information and coverage since they represent many different insurance companies and can help you compare policy features, benefits, and costs.
Going Without Health or Life Insurance Is a Gamble
Legally, you’re bound by law to carry auto insurance if you drive, but there is no law saying you must have life and/or health insurance, unless you live in a state with an individual health insurance mandate. You may get lucky and never need to go to the hospital, and you may die at an old age with nobody dependent upon you financially.
But what are the chances of that happening? Insurance premiums are never fun to pay, but you’ll never remember how much you paid when you’re faced with a catastrophic illness or the death of a loved one.