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Young and Healthy? Don’t Buy Health Insurance on the Individual Market

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UPDATED: Aug 10, 2017

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For the young and healthy in the United States, health insurance has become an absolute rip-off, and it is only getting worse.

Individuals that elect to forgo health insurance on the open market from ages 21-30 and instead invest what would be their premium payments will, in most cases, come out financially ahead.

Before diving too far in, let me preface the article by saying the following has nothing to do with moral responsibility, ethics, politics, or the greater good. It is simply based on math and how the health care landscape of today impacts many individuals. 

Additionally, in the illustrations below I talk about the insurance company “not paying a dime” before deductibles are met. In some cases, an insurance company may pay for part of a routine office visit (or other minor costs) prior to the deductible being reached. These are usually small costs in the grand scheme of things, and do not have much of an impact on the overall outcome illustrated.

My Story

I will begin with a bit of my personal story, which demonstrates how I came to start this research. It also paints a picture of the scenario many individuals and families are finding themselves in.

I am 30 years old, married and the father of two young children. In January, our health insurance premiums nearly doubled for basically the same coverage. For my family of four, our annual premium cost is just south of $10,000.

Let me reiterate this – If no one in my family sets foot in a health care facility all year, our cost will be $10,000.

That makes health insurance premiums the second largest expense behind our home. We spend more on health insurance than gas and food combined.

Our deductible is $1,500 per person or $3,000 for the family. Our coinsurance is 30% and our annual maximum out-of-pocket cost is $12,700 for four of us.

So for all intents and purposes, in the best case scenario we are on the hook for $11,500 per year before the insurance company pays a dime (premiums plus one person’s deductible). Worst case scenario, our cost could reach $22,700.

I laid all these numbers out in a spreadsheet and starting running scenarios.

  • What happens in a year when everyone is healthy?
  • What happens if there is a major health incident with one of the kids?
  • What if we have a baby?

The real kicker came when I started thinking about the likelihood of these scenarios actually happening. I began digging around through any statistics I could get my hands on, and what I found was alarming.

The vast majority of young individuals create next-to-nothing in health care costs, but are now required to foot a large part of the bill for everyone else.

Scenarios

I have to admit, finding the right statistics to calculate the answers I was in search of was difficult. It seems every study about health insurance costs comes up with slightly different averages, but for the most part the trend is obvious. Higher costs for the young and healthy.

21 years old

According to a study done by Sector & Sovereign, a 21 year old male will pay on average $261 a month for a new health care plan on the open market with a $3,649 deductible.

Math:

$261 * 12 months = $3,132 per year.

$3,132 + $3,649 deductible = $6,781 before insurance pays anything.

So why does this matter?

Because according to US Census data, from 2007 to 2009 the average person under the age of 25 years old spent $167 on medical services per year. Of course this data is a few years old, so let’s nearly triple it to account for increases in medical costs over the past 5 years and any cost sharing an insurance company may have paid. Call it an even $500 for simplicity’s sake.

So a 21 year old male can buy a health insurance policy today for $3,132 and would need to spend another $3,649 out of their own pocket before the insurance company would cover anything. However, in all likelihood they will incur around $500 in actual health related expenses.

30 years old

According to a study done by HealthPocket.com, an average Silver level plan for a 30 year old costs $284 a month. The average deductible for a Silver plan in this age group is $2,907.

Math:

$284 *12 = $3,408 per year.

$3,408 + $2,907 deductible = $6,315 before insurance pays anything.

The same US Census study we looked at previously shows the average amount spent on medical services for people 25-34 years of age was $466. Using the same logic as above, tripling it gives us about $1,400.

In this case, a 30 year old would need to spend almost $6,500 a year before the insurance company kicks anything in. Yet their expected expenses are somewhere in the neighborhood of $1,400.

So What Should You Do?

Everyone has their own risk tolerance. I cannot tell you what to do. I can, however, tell you what I would do if I were 21 years old and armed with the knowledge I have now.

  1. Determine the premium amount of the insurance policy I would buy – I would sit down and go over the insurance policies available in my state, and determine which one was right for me. For this example I will use the average for a 21 year old male listed above ($261 / month).
  2. Pay myself the monthly premium payment – Rather than paying the insurance company, I would invest a good chunk of the monthly premium amount automatically in a few mutual funds. The rest I would keep in cash as a buffer for periodic medical costs.
  3. Pay random medical costs out of my monthly budget – Even if I had medical insurance, I would still be paying out-of-pocket until I reached my deductible. For every day medical expenses, this will be basically the same.
  4. Use local clinics and negotiate with cash – A current doctor visit to my primary care physician costs me $220 every time I step foot in his office. A local health clinic costs $90 because I pay them without going through insurance. Same service, same prescription. I would do my due diligence and find affordable options for periodic, planned care.

So now I would be walking around as an “uninsured,” but every month I would be adding to my growing cash reserve that acts as a buffer between me and any health costs. Within 1 year I would amass a nest egg of over $3,000 by simply paying myself instead of the insurance company.

Of course this scenario makes an obvious assumption: I do not have any major medical issue.

The reason I can make this assumption is because statistics show I probably will not.

According to the CDC, the percentage of people ages 18-44 that actually had out-of-pocket medical expenses in 2009 was 76.2%. Of those, only 5.4% had costs in excess of $2,000. That means just over 4% surpassed $2,000 for the year. This includes people up to the age of 44, so it is fair to assume that 21 year olds were even lower.

That means there is at least a 96% chance that the $3,000 I saved could cover all my medical expenses and still have money left over. In fact, I would probably be able to manage the periodic costs with my normal monthly budget and not even touch the premiums I paid myself.

It should be noted that these numbers may reflect people that actually had insurance coverage and still paid over $2,000 in out of pocket expenses. But as mentioned prior, you can often get better deals on regular health care visits simply by going to clinics and paying cash.

Possible Growth of Savings:

Here is an example of what paying myself the premium payments could look like by the time I am 31. In this case, I make a few assumptions:

  • I have no major medical issues that crack my nest egg
  • For simplicity purposes, my premiums remain the same
  • 6% Return
  • 3% Inflation
  • 15% Tax Rate

After 10 years of paying myself and investing the premiums, I would have over $40,000 by my 31st birthday.

Catastrophic Plans

Up until the beginning of 2014, I could pretty much accomplish this plan and still have a safety net in case of a major medical issue.

Catastrophic plans, in my opinion, were one of the greatest tools in my health insurance arsenal. Premium payments were about 1/3 of a regular plan, and the benefits kicked in somewhere after $5,000 in health costs.

Investing the difference in premium payments could yield a similar result as listed above, and at the same time provide insurance coverage for major accidents.

Unfortunately, they were banned in their prior form under the new Affordable Care Act, and the new ones available to those under 30 are overpriced.

What About Major Health Issues That Arise?

The fact is some people get sick, and some people get hurt. It just happens.

$10,000 Hospital Bill

You break your leg, and end up with $10,000 in bills. Depending on how many years you have been saving your premium payments, you may be able to simply write a check from your brokerage account and be done with it. If not, negotiate. Then set up a payment plan and start directing your premium checks toward that bill.

$400,000 Hospital Bill

This is the one that you’re banking on not happening. If it does, there is no way around it. Of all the scenarios I have run, this is the one that cracks the bank.

First and foremost, this is very unlikely. But if it does, you will probably file for bankruptcy.

The average 21 year old has a net worth less than $2,000. The average 30 year old can lay claim to around $9,000. Let’s be honest. Filing bankruptcy at this point is not the end of the world for most people.

Chronic Illness Diagnosis

This is where some people’s moral compass may go awry, but as I mentioned earlier, this is simply an illustration of what can be done.

If you need health insurance because a chronic illness arises, then buy it. You should have cash saved from years investing your premiums, and that can help pay for care until open enrollment comes back around. The longest you should have to float yourself is 9 months.

Under the new health care laws, insurance companies may not discriminate against pre-existing conditions. So if you need insurance from something that pops up, buy it.

Penalties

In most circumstances, skipping health insurance will incur a penalty when filing your taxes. While it is not the end of the world, for certain income levels it can play a role in determining whether forgoing insurance altogether makes sense.

The fee is the greater of:

  • 2014 – $95 or 1% of Modified Adjusted Gross Income (MAGI)
    • $35,000 income = $350
  • 2015 – 325 or 2% MAGI
    • $35,000 income = $700
  • 2016 – $695 or 2.5% MAGI
    • $35,000 income = $875
  • 2017 and beyond – $Adjusted for inflation or 2.5% MAGI

The examples above are based on someone filing as single on their tax return. So for an income around $35,000 the penalty is not considerably high, but also not negligible. As income rises, the penalty becomes more important to consider, especially in later years.

Real Life Application

Applying the above scenario to myself and my wife (with the benefit of hindsight) and assuming we lived in a similar landscape as today, we would have come out significantly ahead by forgoing health insurance most years.

Combined, we have had 16 years of paying health insurance premiums on our own, and in only two of those years did we meet the deductible. Each of those times was due to the birth of one of our children, which we knew ahead of time.

Using examples from above, in the two years where we were having children, we simply could have stepped out of the “uninsured” group and bought insurance. Then jump back out afterward.

Even counting the amount our insurance company paid for the birth of both children, we have paid far more in premiums then we ever received in care. As is typically the case for what is called the “Young Invincibles.”

It is fair to assume that the difference between premiums paid and health care received will continue to rise for 21-30 year olds under the new landscape.

Bottom Line

The recession that began in 2008 spawned a phenomenon that was coined Strategic Defaults. For the first time in recent history, a number of homeowners who could afford their mortgage payments defaulted on purpose because it was financially a better move than staying in a home that was under water.

21-30 year olds are faced with a similar choice when it comes to health insurance. A significant number of individuals could see a brighter financial future by playing the current game outside the lines. The game has been rigged against this age group, and some careful maneuvering could put them on top in the end.

Author’s Notes

This is by no means supposed to be a solution to the growing health care problem in the United States. In fact, it would undoubtedly make the situation worse overall if most of the healthy young adults followed this plan. But I am not here to solve that problem, but rather to help provide guidance for those trying to navigate through the chaos.

This plan is not a one-size-fits-all, and not everyone will benefit from the process. But I invite you to look at your personal situation and actually dig into the details, rather than simply following what everyone else does.

This was not meant to be an exhaustive study on the subject, but rather an overview based on the limited information I was able to find. If anyone has additional statistics that can help paint an even more accurate picture, I would be glad to add them.

About Eric Stauffer

Author: Eric StaufferI am a former insurance agent and banker turned consumer advocate. My priority is to help educate individuals and families about the different types of insurance they need, and assist them in finding the best place to get it.

4 Comments

  1. Mr. Stauffer,

    While I can appreciate your opinion, what you champion here is dangerous to a population where the incidence of cancer continues to grow. I am a former cancer patient whom has personally witnessed what happens to those whom do not have a health insurance policy. As a stage four cancer survivor, it was the treatments that were deemed specialized, that saved my life. If you speak with those who treat cancer, the disease is changing and on its way to reaching epidemic proportions. To advocate that if you are healthy, that you don’t need health insurance is ridiculous. A 25 year old woman that I became friends with contracted cancer. Due to her not having health insurance, she did not have access to extensive treatments that would have saved her life. I would love you see you explain to her family that she was better off not having health insurance. Indeed as you advocate, she saved money. However, she is no longer in a position to reap the benefits of this strategy. There needs to be some common sense included in this strategy that you mention. You quote statistics as a basis for your argument, however if you receive a diagnosis of an advanced cancer, the statistic that your assumptions are flawed are now at 100%. What you advocate is too risky especially if you have children. I have health insurance that is expensive. I also have the piece of mind that if anyone in my home comes down with that dreaded disease, that we have the tools for a successful outcome. No amount of money is worth taking the risk your strategy could expose them to.

    Reply
    • Hi Jeffrey,

      Thank you for taking the time to leave your comment.

      Let me start by saying I am sorry to hear about what you have been through, as well as your friend. I cannot begin to imagine what that has been like. I really do appreciate your feedback.

      The point of this article is to shed some light on the actual math behind the current health insurance landscape. It is also designed to help people make their own decisions based on their personal risk factors.

      While people under the age of 30 do get cancer, the statistics show that the likely hood is extremely low. According to this study from the New York Department of Health, 55.7 out of 100,000 males between the ages of 25-29 get cancer (from 2007-2011) per year, and 72.4 out of 100,000 females. That is a percentage of .06% (0.0006). This was based on the State of New York, specifically.

      While some people feel there is just no excuse to risk it, not everyone shares that belief. There are many people that would be willing to bet against the odds of them getting cancer at this age.

      I do not advocate no health insurance as a fix for the health care industry. I personally think the system is massively flawed, and it starts with cost of care. Until that is fixed, it doesn’t matter who ultimately pays.

      The intent is to show that the young, healthy crowd is footing the bill for a service most will barely use. There are always the extenuating circumstances, but for the vast majority it will continue to be extremely overpriced.

      Sincerely,
      Eric Stauffer

      Reply
  2. You say that:

    “According to a study done by Sector & Sovereign, a 21 year old male will pay on average $261 a month for a new health care plan on the open market with a $3,649 deductible.”

    And subsequently:

    “For this example I will use the average for a 21 year old male listed above ($261 / month).”

    The Forbes article you linked to actually said the following:

    “According to S&S, the average deductible – the amount of money you spend out of pocket before your health insurance kicks in– for plans purchased by a 21-year old man in 2013 was $3,649, bought at an average monthly premium of $144. To purchase a plan with the same deductible now, a 21-year-old would have to pay $261, an 81% increase.”

    $3,649 was the average deductible for a 21-year-old male in 2013 according to S&S, not the average deductible in 2014 (Sector & Sovereign article: . Additionally, $261 is the premium for 2014 plans with comparable deductibles to the average deductible in 2013, but it is not stated to be the average premium for 21-year-olds in 2014. Additionally, this average premium makes no adjustment for subsidies available to most individuals making less than 400% of the Federal Poverty Level, $46,680 for an individual without spouse or dependents in the lower 48 states in 2014. Your wording is, at best, misleading, and at worst a misunderstanding.

    Incidentally, your example of a 21-year-old making $35,000 would be eligible for subsidies unless family size exceeded 4 persons in states that did not expand Medicaid or family size exceeded 7 persons in states that did expand Medicaid. Since subsidies are based on the excess paid for the second lowest cost silver plan over 9.5% of income for individuals at this income level, the premiums for the second lowest cost silver plan are capped at $277 per month for an individual of this profile. The cap would be smaller in a larger household, in Alaska, or in Hawaii. With that in mind, I doubt that the actual national average premium paid (paid meaning after subsidy) by this type of individual would be $261 per month (but, admittedly, I have no source to confirm this).

    Here (http://aspe.hhs.gov/health/reports/2013/marketplacepremiums/ib_marketplace_premiums.cfm) is an HHS publication that quotes the weighted average premium for individuals of all ages (weighted by population data per county) for a 2014 plan in the lower 48 states is $310 for the lowest cost silver plan and $249 for the lowest cost bronze plan. Averages for 21-year-olds will have significantly smaller premiums.

    Additionally, I have some concerns about the way in which you evaluate the risks of remaining uninsured. Here (http://aspe.hhs.gov/health/reports/2011/ValueofInsurance/rb.shtml) is an HHS report from 2011 regarding the inpatient hospital costs incurred by the uninsured. Note that this data only includes inpatient costs, not physician and lab fees or prescription costs. Also note that only individuals under 65 are included which excludes elderly end-of-life or long term care costs. In 2008, 3% of uninsured were hospitalized, and 56% of those hospitalizations cost over $10,000. That’s over a 1.68% chance of a $10,000+ hospitalization in a single year since some individuals had more than one hospitalization. When extrapolated over 10 separate years, this risk cannot be ignored as flippantly as you suggest.

    When addressing the risks of a very large hospital claim ($400,000 is the threshold you suggest) you say the following:

    “The average 21 year old has a net worth less than $2,000. The average 30 year old can lay claim to around $9,000. Let’s be honest. Filing bankruptcy at this point is not the end of the world for most people.”

    However, you previously suggested investing the excess premiums, and came up with an estimated $40,000 return by age 30 (Does this figure account for tax penalties? It should). Surely we are risking this $40,000 (possibly more if you have other investments and savings) at age 30, not the average net worth quoted in your statistics. Additionally, surely a $100,000 or even $75,000 hospital bill would be devastating, wiping out all or most savings and creating a long lasting debt. 5% of hospitalizations of the uninsured resulted in a bill of over $75,000 in 2008. All this says nothing of the devastating emotional toll of going through bankruptcy, especially after a serious illness or accident. The true expected return on your premium savings should subtract all medical spending on a risk-adjusted basis. The $40,000 you quoted is misleading.

    Basically, I think that this analysis is insufficient and a bit sloppy. You haven’t fully considered your risks, and your assumptions seem to shift without warning. I hope that this comes across as constructive criticism. Have a wonderful day.

    Reply
    • Hi Julie,

      Thank you for the comment. Let me try and go through these line by line and explain in more detail.

      First, you cite the the Forbes article saying that my statistics are wrong. I am not sure if we are reading this the same, because it clearly states that to buy a policy with the same deductible ($3,649) it would now cost a 21 year old $261. That is exactly what I said.

      Second, you address the subsidy. Which in all fairness, yes, some people will qualify for. However, many do not. In addition, there are many cases where young adults are thinking they should qualify for a subsidy, but in fact, do not. The subsidy is a factor of income which caps the max cost for a plan. So if someone chooses a plan that is cheaper than their maximum allotted percentage, then they get no subsidy, even of they are under the $46,000 max. Just making under that amount does not automatically mean you get cheaper insurance. Example

      Third, you mention the average policy price for a 21 year old probably being less than $261 years old. Possibly. However, I was using the Forbes article as a source. Which seems to be fairly reliable most of the time.

      Fourth, you discuss the likelihood of an individual visiting a hospital and racking up more than $10,000. By your own admission, you say its a 1.68% chance per year. Factored over 10 years, the number gets higher. Absolutely. However, this article is written for individuals that have traditionally had clean bills of health. The fact is, many of those visiting hospitals and driving up cost averages are people who have known health issues. So a healthy individual is much less likely to need hospital care. Accidents do happen, but your numbers are generalized for an entire population.

      Fifth, you talk about the example health issues I used, and cited the $40,000 return I mentioned. I will start by saying again, these health scenarios are extremely unlikely for an individual which this article was intended. Yes, people do get in accidents and end up with large hospital bills. Planes also fall out of the sky and cars crash. It does not prevent people from using them. And to your point of a $100,000 hospital bill – The same rules apply as a $400,000 doctors bill.

      Finally, regarding this analysis being insufficient and sloppy. It was never intended to be a scientific study presented to other health insurance professionals. Especially not those that have skin in the game trying to get young, healthy people to sign up. It was meant to paint a picture that would help people start making decisions on their own, rather than doing what is spoon fed to them.

      The bottom line is that by no stretch of the imagination, will the average healthy, young adult ever get back what they put into the health care system. Especially as it currently stands. By limiting the maximum you can charge the older, unhealthy adults to a factor of the young adults means that the people who cost the most are going to get a way better deal than those at the other end. These data points clearly show that.

      Best,

      Eric Stauffer

      Reply

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