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Cheap health insurance for 20-somethings

Whether you've just graduated from college or have been out of school for a couple years, you could be facing a health insurance dilemma.

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You could be facing a health insurance dilemma.

Chances are you were covered by your parents' health insurance policy while you were a full-time student. Most health plans will stop covering the children of policyholders once the children reach the ages of 22 to 25. The benefits could end sooner, when a policyholder’s son or daughter is not a full-time student. You might have been covered by a health plan offered by your college, which ended when you graduated.

If you don't have a job lined up right away, or if your new employer doesn't offer health benefits, you must decide which you can least afford: buying insurance or going without it. Even though you might not want to spend the money on health insurance premiums, don't be tempted to go without at least some kind of health insurance to pay for hospital or doctor visits should you become sick or injured. All it takes is one car accident, an ankle broken shooting hoops or an allergic reaction to a bee sting to saddle you with massive doctor and hospital bills that can hang around for years.

Finding the right option

Even if you are on a tight budget or if you'd rather spend your money on fun stuff, you have a variety of options for health insurance. Individual health plans range from bare-bones hospitalization coverage to comprehensive HMOs that include prescription medications and wellness care.  

Option 1: Major medical coverage

You might think an inexpensive plan that covers only severe injuries is the way to go, but a close look at such plans might change your mind.

Major medical plans, or "catastrophic health insurance" policies, as they are known, typically come with a very high deductible (ranging anywhere from $500 to $15,000) and a high maximum benefit payment, such as $2 million. They are intended only to pay for major hospital and medical expenses, not routine visits to the doctor's office or trips to the emergency room to get stitched up. A catastrophic plan would cover such things as treatment in an intensive-care unit for 10 days after an auto accident or complications from a pregnancy.

Pressing questions when you're shopping for a health plan

Can you (or your family) afford to pay all your medical expenses if you become sick or injured and have no health insurance?

How much is the premium per month, quarter and year?

How much is the deductible?

Is the deductible yearly or per illness or injury?

How much of a deductible can you afford?

Are there any discounts available?

What is the co-insurance or co-pay per office visit?

What is the co-insurance or co-pay for wellness care?

How extensive do you want your coverage to be?

Do you need prescription medications?

Do you mind being confined to a provider network?

Can you afford to pay for doctor's office visits on your own?

Do you play sports where you could get injured?

Do you have any pre-existing conditions?

Do you get sick often?

There is a niche market for such plans: People who are healthy but want to protect their assets or young people who aren't married and have no dependents. A healthy person who unexpectedly suffers a serious illness might not be able to afford a $5,000 deductible. You must decide what you're comfortable with paying if the worst happens.

Option 2: Short-term health insurance

As its name implies, short-term health insurance lasts from one month to one year. That makes it a potentially good option if you're between jobs or waiting for your employer-sponsored health plan to kick in.

Plans are generally comparable to HMOs or similar plans and typically cover various hospital charges, office visits, diagnostic tests prescription drugs. Maternity costs are not covered, however. Unlike an HMO or PPO, short-term coverage is an indemnity plan: That means you're not limited to a network of doctors.

Most recent graduates choose a $250 or $500 deductible.

You can generally pay for a short-term plan in either monthly installments or one single up-front sum; paying up-front will lower your total premium cost.

Short-term policies are a good way to secure coverage when you're temporarily lacking coverage. If you don't have another option in sight, however, you're better off looking for a longer-term individual health plan. For more on that, see Tips for buying individual health coverage.

The downside of short-term policies

There are a few things to keep in mind.

With some insurance companies, the deductible you pay is per injury or illness. That means you must meet the deductible all over again each time you are treated for a sinus infection or other illness.

Short-term policies also have certain strict eligibility requirements, although they will vary from insurer to insurer. If you have ever been denied health coverage, you might be ineligible for short-term insurance because a denial suggests you might have significant health problems. In addition, if you have a pre-existing condition (an illness or chronic condition you've had within the previous three to five years), it won't be covered under most short-term plans. The highest deductibles are generally chosen only by older folks in an effort to lower premiums. Pregnancies aren’t usually covered, although complications arising from pregnancy generally are.

You probably won't be eligible for short-term insurance if you are covered by any other health plan, work in a hazardous industry (such as construction) or play in professional or collegiate sports.

What happens if you bought a three-month policy only to find the job you hoped to land — with health benefits — hasn't materialized? Don't count on automatic renewal of your short-term policy. You have to go through the application process all over again and take out a new policy. If you had any illnesses or injuries during your previous policy period, those now become pre-existing conditions and might not be eligible for coverage.

Shop around on your own or talk to an insurance agent to make sure you get a plan that's right for you. For more, see The basics of short-term health insurance.

Option 3: COBRA

COBRA allows you to continue to purchase your employer's group health plan for 18 months after you leave a job.

Known formally as the Consolidated Omnibus Reconciliation Act, COBRA was designed to protect people who change or lose jobs and are threatened with the loss of their employee benefits plan. The monthly premiums are expensive.

COBRA can also benefit young people who have relied on their parents' health plans.

While most people only qualify for 18 months of continued coverage under COBRA, those who get kicked off their parents' policies due to age or lack of student status can get COBRA for up to 36 months. For more, see Know your COBRA rights.

If you had health insurance through your college's health plan, you will not be eligible for continuation under COBRA.

Option 4: High-deductible health plan and Medical Savings Account

Medical savings accounts (MSA) and high-deductible health plans (HDHPs) open the door to health insurance for those who might otherwise not be able to afford coverage. To qualify, you must be an employee (or the spouse of an employee) of a small employer (who had an average of 50 or fewer employers during one of the last two years) or a self-employed person (or the spouse of a self-employed person).

A high-deductible health insurance plan has lower monthly premiums than a standard individual health plan. You'll take the money you save on premiums and put it in your MSA to spend on non-covered medical expenses as needed.

Some HDHP provide preventive care benefits plus hospitalization, while others cover only catastrophic care. Preventive care includes periodic health evaluations, well-child care and immunications, and routine prenatal care.

There has been an explosion of HDHP choices in recent years. Because HDHPs are not "one size fits all," it's important to shop around for a plan that best covers your needs.

You'll need to predict your health care use for the coming year: The higher your deductible, the lower your premiums will be. If you don't anticipate using the plan much, you might opt for a very high deductible and take a gamble that you won't need to pay the maximum out of pocket.

There are eligibility requirements to open an MSA. For more, see Medical savings accounts: Another way to pay for health care.

Some other health insurance options:

  • Alumni associations: Most college alumni associations offer various types of health insurance to graduates. Contact your university for information.
  • Individual policy: Individual policies are generally much more expensive than group plans you'd buy through work. If you have no other choice, it is better than going without insurance. You might have to meet certain health requirements to qualify and pre-exisiting conditions will likely not be covered. Shop around to get the best deal.
  • High-risk health plans: If your health disqualifies you from buying a plan on your own, you may be eligible for your state's "high-risk pool." Contact your state's department of insurance for policy and eligibility information.
  • Medicaid: You must meet certain poverty-level income guidelines, or be disabled, to qualify for Medicaid. For most young people, this is not an attractive option.

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