What Is Health Insurance? How It Works, Costs and Types

Health insurance is an insurance product that covers hospital stays, doctor visits, prescription drugs and other related services, reducing health care costs for individuals and allowing them to access medical treatments that may otherwise be unaffordable. Several types of health insurance exist — including private, public and employer group plans — all of which may vary in terms of costs and coverage.

Keep reading to learn more about what health insurance is, what health care services it usually covers and how much you can expect to pay for coverage.

On This Page

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  What Is Health Insurance, and How Does It Work?

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  What Does Health Insurance Cover?

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  What Are the Most Common Types of Health Insurance?

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  What Are the Benefits of Health Insurance?

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  What Is the Average Cost of Health Insurance?

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  How To Get Health Insurance

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  FAQs

What Is Health Insurance, and How Does It Work?

Health insurance is a policy that reduces the financial burden associated with medical services by distributing the costs between the insured and their health insurance company. Generally, the insured must subscribe to their health insurance plan by paying a regular premium — often on a monthly basis. In exchange, the insurance carrier agrees to cover a portion of the costs whenever the insured receives medical care.

On top of the regular premium payments, there are typically other out-of-pocket costs the policyholder must pay when they receive health care:

1. Deductible: Your deductible is the amount you must pay out of pocket before your health insurance coverage kicks in. Unlike home and auto insurance, which apply deductibles on a per-claim basis, your health insurance plan has a single deductible for the entire year. The average deductible for plans from the Health Insurance Marketplace is $2,912.^[1]
2. Copayment: After meeting your deductible, you may still have to contribute toward your health care costs by making copayments. Also known as a copay, this refers to a flat fee you must pay out of pocket when you receive a covered medical service. For example, if your plan requires a $20 copay for doctor visits and your primary care physician charges $100 per visit, then your insurance company will pay out $80 toward your claim.
3. Coinsurance: Alternatively, some plans or services may require you to pay coinsurance after reaching your deductible. Rather than a flat amount, coinsurance is set at a percentage of the cost of the service you receive. For example, if you undergo a $5,000 procedure and your plan requires a 20% coinsurance payment for surgeries, then you will have to pay the first $1,000, and your insurer will cover the remaining $4,000.
4. Out-of-pocket maximum: There’s a limit on the total amount your insurer can require you to spend on deductibles, copays and coinsurance within a year. Once you’ve reached this limit, your insurance will take care of 100% of the costs for covered services for the remainder of the year. In 2026, the out-of-pocket maximum for Marketplace plans can be no more than $10,600 for single coverage or $21,200 for family coverage.^[2]

Keep in mind that your health insurance may only cover the costs when you see a provider that is part of your plan’s network, and you may need a referral from your primary care doctor before visiting a specialist. These requirements depend on the type of plan you choose, with common types including health maintenance organization, preferred provider organization, exclusive provider organization and point-of-service plans.

What Does Health Insurance Cover?

All health insurance plans that are compliant with the Affordable Care Act must cover at least the following benefits:^[3]

Marketplace plans are required to cover in-network preventive services with no cost-sharing requirements, meaning you generally won’t have to pay a copay or coinsurance — even if you haven’t yet met your annual deductible. Examples of covered preventive care benefits include these:^[4]

• Blood pressure, cholesterol and Type 2 diabetes screenings
• Syphilis, tuberculosis and lung cancer screenings
• Obesity and diet counseling
• Cessation intervention for tobacco users
• Fall prevention for elderly adults living in a community setting
• Depression screenings
• Hepatitis B, hepatitis C and HIV screenings
• Immunizations for chickenpox, flu, measles, shingles and tetanus

What Isn’t Covered?

Your health insurance company may choose to exclude coverage for any service that it isn’t required to cover by the ACA, so exclusions may vary from plan to plan. Services that commonly are not covered by health insurance include the following:^[5]

• Cosmetic procedures that are not considered medically necessary, such as Botox injections and plastic surgery
• Dental and vision care for adults
• Certain fertility treatments, such as in vitro fertilization and egg freezing
• Acupuncture, massage therapy and other alternative therapies that are not part of a recommended care plan
• Experimental or unproven treatments

Even if they are not covered by your basic health plan, some of these services may be covered by other insurance policies, such as standalone dental or vision insurance.

What Are the Most Common Types of Health Insurance?

In the upcoming sections, you’ll learn more details about some of the most common types of health insurance plans.

Employer Group Policies

Employer-sponsored group health insurance is the most common type of health insurance in the United States by far, accounting for more than half of the nation’s insured population in 2024.^[6] On average, employers cover 84% of the cost of individual plans and 74% of the cost of family plans covering their employees.^[7] As a result, your share of the premium for a work-based health plan may be lower than what you would have to spend on a separate plan.

Marketplace Plans

If you want a private health plan but aren’t eligible for coverage through your job, you can buy a plan through the federal Health Insurance Marketplace or your state’s equivalent health exchange, if applicable. These plans are regulated by federal law, so they must cover specific benefits and extend coverage to people with preexisting conditions.^[8] In addition, you may qualify for subsidies that lower your premium, depending on your income.

Government Programs

People who meet certain eligibility requirements may qualify for government-funded health care programs. For example, Medicaid is jointly funded by the federal government and state governments, and it provides coverage at little to no cost. Eligibility requirements vary by state, but Medicaid is generally available to low-income people, Supplemental Security Income recipients and qualified pregnant women and children.^[9]

Meanwhile, Medicare is available to people who are at least 65 years old and to younger individuals who have a disability, ALS or permanent kidney failure.^[10] Medicare Part A — or hospital insurance — is free if you or your spouse paid Medicare taxes for at least 10 years, while you can pay extra to receive coverage for outpatient medical services and prescription drugs through Parts B and D, respectively.^[11]

Supplemental Health Insurance

Supplemental health insurance refers to extra policies that provide limited coverage for certain medical expenses — potentially including services that are otherwise excluded from health insurance coverage. Common examples of supplemental health plans include vision insurance, dental insurance, hospital indemnity insurance, critical illness insurance and — for Original Medicare beneficiaries — Medigap.

What Are the Benefits of Health Insurance?

The main benefit of health insurance is that it can soften the financial impact of often costly health care services necessitated by unexpected accidents or illnesses. Without coverage, certain medical benefits may be prohibitively expensive for most people. For example, it often costs around $7,500 to treat a broken leg, $30,000 to stay in a hospital for three days and hundreds of thousands of dollars to receive comprehensive cancer treatments.^[12]

Additionally, maintaining health insurance may be necessary to avoid paying a tax penalty, depending on your state. While the individual mandate has been removed at the federal level and in most states, you may still be charged a fine if you go without health coverage in California, Massachusetts, New Jersey, Rhode Island or Washington, D.C.^[13]

Do I Have To Renew My Health Insurance Every Year?

Generally, Marketplace and Medicare plans renew automatically each year if you don’t make any changes to your coverage.^[14][15] Medicaid coverage may also auto-renew, but you could be required to renew it manually, depending on your state and circumstances.^[16] If you’re insured through your employer, double-check your plan documents or ask your human resources department for clarification on the health insurance renewal process.

What Is the Average Cost of Health Insurance?

The average cost of health insurance can vary, depending on how you obtain coverage. Employer group plans cost an average of $777 per month for individual coverage and $2,249 per month for family coverage in 2025, while Marketplace benchmark plans cost an average of $625 per month in 2026.^[7][17] That said, the amount an individual personally has to pay for these plans is often lower due to employer contributions or premium tax credits.

Original Medicare beneficiaries can expect to pay at least $202.90 per month for Medicare Part B in 2026, but the cost of Medicare may be as high as $1,254.90 per month, depending on the Medicare member’s income and how long they spent paying Medicare taxes.^[11] Medicare Advantage costs an extra $14 per month on average, although most Medicare Advantage plan members don’t have to pay anything besides their Part B premium.^[18]

How Are Health Insurance Rates Determined?

ACA-compliant health insurance companies cannot consider your current health status, medical history or gender when setting rates. Instead, your health insurance premiums are calculated based on the following factors:^[19]

• Your age
• Where you live
• Whether you use tobacco
• Whether you have individual or family coverage
• The plan’s tier

How To Get Health Insurance

You can buy health insurance from the ACA Marketplace during open enrollment, which runs from Nov. 1 to Jan. 15 in most states. Also, you may be able to sign up during a special enrollment period if you experience a qualifying life event, like getting married or losing your existing health coverage.^[20] Meanwhile, Medicare open enrollment lasts from Oct. 15 to Dec. 7, and Medicare Advantage open enrollment lasts from Jan. 1 to March 31.^[21]

If you are eligible, you can enroll in Medicaid or the Children’s Health Insurance Program at any point during the year.^[20]

Though comparison shopping on your own can be burdensome, SmartFinancial is here to help. Simply complete an online form, and we’ll match you with an insurance agent who can find the best health insurance plan for your situation. Click here to type in your ZIP code and begin shopping for health insurance quotes at no charge!