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Do You Need Short-Term Health Insurance?

Author: Andrew Davis

Colloquially known as Obamacare, the Affordable Care Act (ACA) requires that most Americans carry health insurance or pay a tax penalty. But sometimes, the timing is against you. Sure, there's one of your state's marketplace exchange plans – but you can only sign up for it during "open enrollment," a period of about three months each fall and winter (Nov. 1. 2015 to Jan. 31, 2016 this year). The exception: If you have one of the qualifying life events, such as getting married or having a child, that grants you a 60-day special window; see Can You Use A Healthcare Exchange After Open Enrollment?

Perhaps you've just gotten too old to be covered as a dependent on your parents' plan, and your own employer doesn't have one. Or, say you've just joined a company that does offer healthcare coverage, but it mandates a three-month waiting period before new employees are eligible. So what do you do?

We have a few words for you: short-term health insurance. It's not perfect, but it can tide you over.

According to the Wall Street Journal, a growing number of Americans are also using cheaper, less comprehensive short-term plans as a less-costly substitute for Affordable Care Act coverage, even though having it doesn't protect you from the act's penalties for being uninsured (see Obamacare Penalty Enforcement: How It Works). Sales of these policies are "up sharply," the paper reported, citing increases of 200% and 150% at two insurers.

How It Works

Short-term health plans, also called gap plans or temporary plans, typically cover a period of one to 12 months. They're designed to cover unforeseeable medical needs that arise, offering an alternative to going uninsured and paying the out-of-pocket for any procedure or treatment. In some cases, you can get approved for a policy almost immediately after applying.

Today's short-term plans are similar to the individual plans that existed before Obamacare became effective. They don't have to cover what the law deems "essential health benefits" (see Essential Health Benefits Under the Affordable Care Act), including emergency room visits, hospitalization, lab services and maternity care. So read the policy carefully to see what it will pay for and what it won't. (Services That Health Insurers Often Decline provides some general rules-of-thumb.)

These plans are subject to medical underwriting and aren't guaranteed issue, meaning you could be rejected if insurers think you're too big a risk. For example, some policies say you shouldn't even bother to apply if you're pregnant, have diabetes or have cancer; you won't get approved. Short-term health insurance doesn't cover pre-existing conditions and policies can only be renewed a limited number of times – or in some cases can't be renewed at all, especially if you end up filing an expensive claim.

Where to Get It

You can shop for a short-term health insurance plan through an online broker such as eHealth. You can also enlist the help of a living, breathing agent who sells health insurance. Reputable brokers and agents do not charge consumers application fees or other fees; they are paid commissions by the insurance companies (learn more in How Does an Insurance Broker Make Money?). Another option is to head directly to your favorite health insurer's website and buy a policy directly through the company. It's a good idea to shop around so you can compare plans and choose the one with the best combination of premiums, deductibles, co-insurance and coverage for your situation. Some states have many options; others have few.

The Price Tag

Short-term health insurance may seem appealing at first glance because it has lower premiums than ACA-compliant plans. In fact, many consumers have purchased short-term health insurance for this very reason. But whenever you pay low premiums for insurance, you can expect minimal coverage, a high deductible or both, and that's exactly what you get with short-term health insurance. It also has a lifetime maximum – a total limit on how much the insurance company will pay for your care – which might not seem like a big deal if you're currently healthy, but treating a costly illness or a having a surgical procedure can burn through that sum frighteningly fast. Costs vary widely by state and by plan, and short-term health insurance is not eligible for ACA subsidies.

Here's an example of what a short-term health insurance plan looks like. A 40-year-old nonsmoking male living in Chicago can get a six-month plan for as little as $77 per month, with a $7,500 deductible, 50% coinsurance after meeting the deductible and a $2 million lifetime maximum. Such a policy would not provide any coverage for an inexpensive event such as going to the doctor to be treated for strep throat. Even so, it could be indispensable if he were hospitalized for an infection or diagnosed with an expensive condition like cancer, assuming the plan covers these scenarios.

The Tax Bill

Here's another bit of bad news. Short-term health insurance plans don't count as minimum essential coverage under the Affordable Care Act. That means you may have to pay the tax penalty for being uninsured, even though you technically aren't.

Penalties are calculated by income and per person, and you'll pay the penalty based on which calculation results in the higher amount. In 2015, the penalty is 2% of your annual household income that's above the tax filing threshold (not to exceed the national average of a marketplace bronze plan annual premium) or $325 per adult and $162.50 per child under 18, whichever is greater. In 2016, the penalty is 2.5% of your annual household income above the tax return filing threshold or $695 per adult and $347.50 per child. (The aforementioned "bronze plan" is the most basic of the insurance plans offered by state health care exchanges. See Choose Among Bronze, Silver, Gold And Platinum Health Insurance Plans.)

However, if your "short term" is very short, you'll be glad to know that the ACA has an exemption for "a short gap in coverage" of "no more than two consecutive months." Click here to read the details.

The Bottom Line

If you've outgrown your dependent status, are in between jobs, have retired but aren't yet eligible for Medicare, are outside the marketplace "open enrollment" period, or find yourself in another situation that's left you uninsured, short-term health insurance is the solution.

But it's far from ideal. While the monthly premiums are low, these plans have high deductibles and are limited in what they cover, so do your best to keep emergency savings on hand until you can get more comprehensive coverage. Short-term health insurance should be your last resort – and a stopgap, until you get insurance through work, qualify for Medicare or marketplace open enrollment begins. And while you wait, read How to Shop for Health Insurance.

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