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The Price of Cheap Insurance

A few weeks back, my fellow Fool Anders Bylund spilled plenty of digital ink praising the virtues of Health Savings Accounts, or HSAs. His thesis, in a nutshell, was that the higher premiums that come with more comprehensive plans do more to pad the pockets of insurers than to protect the families they're supposed to cover.

He's mostly correct; HSAs can be wonderful, in that they allow you to pay common expenses in pre-tax dollars and invest the remainder in interest-bearing savings, bonds, or even blue-chip stocks such as General Electric (NYSE: GE  ) , UnitedHealth Group (NYSE: UNH  ) , or Aetna (NYSE: AET  ) . But "can be" is the key catchphrase, Fool. Not all insurance plans are created equal, especially if -- like Anders and I -- you're among the millions of self-employed Americans.

Follow the crowd, or be an individual?
That's because there's a huge difference between individual and group plans. HSAs are typically available for both styles. What's the difference between them? Cost. Individual plans trade the right to exclude preexisting conditions for lower premiums. Group plans, conversely, trade the security of comprehensive coverage for higher premiums.

Here's why this matters: HSA plans aren't that much cheaper when offered as a group option. My agent recently quoted me for a group HSA that would have cost more than double the well-advertised individual HSA options available at eHealthinsurance.com.

Why? Coverage limitations. Consider this text from the exclusions document attached to a plan that eHealthinsurance.com says would cost our family of five $209 a month:

Preexisting conditions will not be covered during the first 12 months after an individual becomes a covered person.

In other words: Under this plan, my eldest son's severe food allergies could remain uncovered for at least a year. And "at least" is the important phrase here. Individual plans, you see, can turn away anyone, and our son isn't exactly a profitable insurance customer. Since we didn't want our 4-year-old on Medicare, we decided that a group plan would be our best and most economical choice.

3 steps to a better insurance plan
But an HSA still wasn't for us. We had more than $10,000 alone in out-of-pocket medical expenses during 2005. And many of those expenses were discounted and partially covered by our group insurer, which also happens to be UnitedHealth. I can only imagine what the damage would be under a lightweight HSA plan.

To be fair, an HSA wouldn't be terrible if we were able to cover all out-of-pocket expenses pre-tax. But HSAs have contribution limits: $2,700 for individuals and $5,450 for families during 2006, according to the Feds.

So, there's no such thing as a one-size-fits-all insurance plan. That's why I think it pays to ask these three questions before you buy any insurance pitch:

1. How does the agent get paid? Before joining UnitedHealth, we looked into an individual plan hawked by an agent affiliated with the National Association of the Self-Employed, or NASE. We soured on the policy after discovering that he only sold NASE plans, making him the insurance equivalent of a so-called financial advisor who only sells high-fee load funds. Fortunately, Colorado is like most states, in that it has a try-and-buy provision when it comes to insurance. We had a refund within 30 days. (Find out about your state's guidelines by visiting the website of your local insurance commissioner.)

2. Will we have special needs? Are you newly married and planning to have kids? Better find out whether that individual policy you're looking at covers maternity. It may not; states determine minimum insurance requirements and, in an ironic twist, many stuffed between the coasts don't consider maternity a "must-have" for individual plans. If that's the case where you live, ask your insurer to price a rider for coverage. Also ask what out-of-pocket expenses you may still expect to pay. The math could put a group plan in a more favorable light.

3. What can we really afford? Have a number in mind when you go shopping for plans. Your goal, naturally, is to get the most coverage for the dollars you're willing to pay. If an HSA is atop your list, make sure you include both premiums and contributions in your calculation. For example, a family HSA with a $200 premium will cost $654.17 monthly at a maximum contribution rate ($200 + $5,450 / 12, or $454.17).

Follow the money
I like the do-it-yourself sites such as eHealthinsurance.com. They can be very useful if you're healthy and have no dependents or other needs. But, if you're at all like us -- saddled with a not-so-simple tax situation compounded further by kids with health issues -- it might pay to hire a professional. We shopped for months while still under the protection of COBRA. Today, thanks to a sharp accountant and a caring agent, we're able to write off all of our medical expenses on our taxes, which is nearly as good a deal as an HSA may be for Anders and his family. So, don't just buy the hype; do the homework.

Have other money tips? Tell me. I'm writing new articles on personal finance and investing basics every week as part of our new personal finance advice service, Motley Fool GreenLight. It's tailor-made for Fools like you who aim to take control of their financial destiny. Check it out if you're interested.

UnitedHealth Group is both aStock AdvisorandInside Valuerecommendation. To see why, start your own free 30-day trial today.

Fool contributor Tim Beyers knows this is a somber day for thousands and that, for them, insurance is last on the list of many concerns. He wishes them peace and a lifetime of Foolishness. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get a peek at everything he's invested in by checking his Fool profile. The Motley Fool's disclosure policy is in peak condition.


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Tim Beyers
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Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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