Health insurance and its payment methods are not always easy to understand. For example, what is the "co-pay" you may be required to pay at the doctor's office? If you become disabled, how will you pay for your health insurance? What is this COBRA you hear about when health insurance is discussed at your workplace? Let's try to clear up some of these mysteries.

Co-Pay

If you are employed and your employer offers health insurance, you will often have to pay only the "co-pay" when you pick up a prescription or visit your doctor. This is an amount that is considered your share of payment for services covered by your health insurance.

It's a much smaller amount than you would have to pay otherwise: often only $10 to $30, depending on the insurance contract and the service. The health insurance company pays the rest of what it determines is the fair cost for the service.

HSA

Your employer may offer the option of a Health Savings Account (HSA). This is a tax-advantaged savings account. You decide what percentage of your income before taxes will be automatically deposited into a savings account that is set aside for healthcare expenses. Because this deposit is taken out of your paycheck before taxes are calculated, it lowers your taxable income.

With an HSA, you save tax money and you also put aside money toward your health care costs. When you withdraw money from this account to pay for medical care costs, there is no tax levied on the withdrawal. However, if you withdraw funds for other purposes, tax will be applied at the time of withdrawal, exactly as it is when you withdraw funds from an IRA.

Medicare

Once you reach your 65th birthday, you are automatically eligible (in the United States) for Medicare, the government-sponsored health insurance plan. Medicare also applies to people with certain disabilities. Medicare does not pay all healthcare expenses, but it does pay part of most of them. If you have other health insurance, it becomes secondary to Medicare, and often will pick up part of the costs that are denied by Medicare.

Medicare has recently added prescription benefits; they are rather complicated, and require careful study and comparison to find the best plan for you. When Medicare is your primary form of health insurance, you should make yourself aware of the applicable restrictions.

COBRA

COBRA is the acronym for the Consolidated Omnibus Budget Reconciliation Act of 1985. This law, passed by the US Congress, makes it possible for most employees to continue their health insurance after leaving their employment.

Two important things to know about COBRA are that you will have to pay the full premium, including the part that was formerly paid by your employer, each month, as well as a 2% administration charge; and that the term during which you can continue to use the health insurance is generally limited to 18 months (in some special cases, 36 months).  In addition, COBRA only applies to employers who have more than 20 employees.

Understand the Payment Terms

When you are considering health insurance, it is very important to be sure you understand the terms of payment. If you're going to be joining your employer's health insurance plan, talk with someone in Human Resources about the details, and ask any questions you may have. So long as you do your homework and know what your obligations will be, paying for your health insurance can be fairly straightforward.