Health Insurance Basics: Terms and How to Choose a Plan

What Are Health Insurance Basics and How Do You Choose the Right Plan?

Health insurance helps protect you from high medical costs by sharing expenses with an insurer. But plans differ in price, provider access, and how costs are split. This guide breaks down the terms you’ll see, explains how the most common plan types work, and gives a step‑by‑step process to select a plan that matches your health needs and budget. It also links to deeper resources on related topics at FinHelp.

How health insurance works (simple overview)

At its core, a health insurance plan defines:

• The premium: what you pay to have the policy (usually monthly).
• Which services are covered and under what rules.
• How costs are shared when you use care (deductibles, copays, coinsurance).
• Who you can see for care (the provider network).
• The out‑of‑pocket maximum: the annual cap on what you’ll pay for covered services.

You pay premiums to maintain coverage. When you get care, you may first pay a deductible, then share costs via copays or coinsurance until you hit your out‑of‑pocket maximum, after which the insurer pays 100% of covered services.

Common plan types and what they mean for you

• HMO (Health Maintenance Organization): Lower cost when you use in‑network providers; usually requires a primary care physician (PCP) and referrals for specialists.
• PPO (Preferred Provider Organization): More provider flexibility and no referral requirement; higher premiums are common for that flexibility.
• EPO (Exclusive Provider Organization): Similar to PPO on network flexibility but usually no out‑of‑network coverage except emergencies.
• POS (Point of Service): Hybrid of HMO and PPO — may require referrals but allow limited out‑of‑network access.
• HDHP (High‑Deductible Health Plan): Lower premiums, higher deductibles. Often paired with Health Savings Accounts (HSAs) that provide tax advantages when used properly.

Each structure affects both your access to providers and how much you pay when you use care. In my experience advising clients, people who expect frequent visits or specialist care often prioritize lower deductibles and broader networks, while healthy individuals with few expected medical needs may favor HDHPs paired with an HSA.

Key terms — plain language definitions

• Premium: Your recurring payment to keep the plan active. Employer contributions can lower what you pay out of pocket.
• Deductible: The amount you must pay for covered services before the plan begins to share costs (some services such as preventive care may be covered before the deductible).
• Copayment (copay): A fixed fee for specific services (e.g., $25 per primary care visit).
• Coinsurance: A percentage of the cost you pay after meeting the deductible (for example, 20% of an expensive procedure).
• Out‑of‑Pocket Maximum (OOP max): The most you will pay in a plan year for covered services. Once reached, the insurer covers 100% of covered costs for the rest of the year.
• Network: The doctors, hospitals, and pharmacies contracted with the insurer. Staying in‑network usually lowers your costs.

For more on how deductibles affect household finances, see our guide: How Health Insurance Deductibles Affect Your Budget.

Step‑by‑step: How to choose the right plan

1. Inventory your household’s health needs

• List regular prescriptions, chronic conditions, planned procedures, and expected specialist visits.
• Estimate how often each person sees a provider and whether care must be in‑network.

1. Compare total annual costs, not just premiums

• Calculate expected annual premium + (estimated use × relevant cost sharing). Don’t forget co‑pays and coinsurance on top of the deductible.

1. Check network coverage

• Confirm your preferred providers and hospitals are in‑network. If you have a specific specialist or pediatrician, network access can be the deciding factor. Read our article on networks for more: How Health Insurance Networks Affect Your Medical Bills.

1. Review prescription drug coverage

• Check the plan’s formulary (drug list) for tiers, prior authorization rules, and mail‑order options. High drug costs can quickly erase premium savings.

1. Consider deductible vs. OOP max tradeoffs

• Lower deductibles usually mean higher premiums but less cost when you use care. Evaluate if paying higher premiums is better than risking a large deductible.

1. Decide if HSA eligibility matters

• If you choose an HSA‑eligible HDHP, you can contribute pretax (or tax‑deductible) dollars to an HSA and use them for qualified medical expenses. HSAs are a strong tool for tax‑efficient savings if you’re comfortable with higher short‑term cost exposure (see IRS Publication 969 for HSA rules).

1. Factor in subsidies and employer contributions

• If you’re buying coverage on a Marketplace, premium tax credits can drastically reduce premium costs. If employer coverage is available, compare the employer’s plan and contributions to Marketplace options.

1. Check enrollment windows and special enrollment rules

• Open Enrollment typically occurs annually; special enrollment periods are available after qualifying life events (loss of coverage, birth, marriage, etc.). For current dates and Marketplace rules, consult HealthCare.gov or your state’s exchange.

Real client vignette (practical application)

A client recently chose between a PPO and an HDHP. She expected only routine care but had a medication with significant monthly cost. After comparing the total expected yearly cost (premiums + copays + prescription cost sharing), the HDHP with an HSA was slightly cheaper in premiums but more expensive once the drug cost was factored in. She ultimately chose the PPO to reduce out‑of‑pocket prescription costs and preserved predictability — a common tradeoff I see when clients have ongoing medication expenses.

Enrollment options and special situations

• Employer plans: Often more affordable due to employer contributions. Review the Summary of Benefits and Coverage (SBC) carefully.
• Marketplace (ACA): Offers premium subsidies for qualifying incomes and essential health benefits. See HealthCare.gov for details.
• Medicaid and CHIP: Income‑based public programs that provide low‑ or no‑cost coverage for eligible individuals and families.
• Medicare: Federal coverage for people 65+ and certain younger people with disabilities. If approaching Medicare eligibility, compare Part B, Part D, and Medigap or Medicare Advantage options.
• Short‑term plans: May be cheaper but often exclude preexisting conditions and essential benefits — review exclusions carefully. For a focused primer on temporary coverage, see our article: What to Know About Short‑Term Health Insurance Plans.

Common mistakes and how to avoid them

• Choosing by premium alone: A low premium can hide higher overall costs if the deductible, coinsurance, or drug coverage is weak.
• Ignoring network rules: Out‑of‑network care may cost substantially more or be excluded.
• Missing special enrollment periods: Losing employer coverage triggers a limited window to enroll in Marketplace plans.
• Not checking prior authorization and step therapy rules: These can delay or limit access to certain medications or procedures.

Quick checklist before you enroll

• Are my primary doctors and preferred hospital in‑network?
• Does the plan cover my prescriptions at a reasonable tier?
• What will my annual out‑of‑pocket exposure look like under realistic use?
• Am I eligible for premium tax credits or an HSA?
• What are the open enrollment and special enrollment deadlines?

FAQ highlights

• Will I face a federal tax penalty for being uninsured? The federal penalty was reduced to $0 in 2019; however, some states have their own mandates. Check state rules and HealthCare.gov for updates.
• Can I change plans mid‑year? Only during special enrollment periods triggered by qualifying life events, unless you have a plan that allows changes for other reasons.
• Are preventive services covered? Most plans must cover certain preventive services without cost sharing under the ACA; verify the specific services on your plan’s documents.

Sources and further reading

• HealthCare.gov — Enrollment rules, subsidies, and Marketplace guides.
• IRS Publication 969 — Health Savings Accounts and other tax‑favored health accounts (for HSA eligibility and contribution rules).
• Consumer Financial Protection Bureau (CFPB) — Consumer tips for comparing plans and protecting yourself from surprise medical bills.

This page is educational and not personalized financial or medical advice. For decisions that affect your finances or health coverage, consult a licensed insurance broker, a qualified financial advisor, or your employer’s benefits administrator.

If you want a printable comparison worksheet or a brief questionnaire to rank priorities (cost, network, prescription coverage), tell me which format you prefer and I’ll provide a template.