9.1 Health Insurance Concepts and Defining Insured

Why Health Insurance Exists

Health insurance transfers the financial risk of medical expenses from an individual to an insurer in exchange for premium. Unlike life insurance, which pays a fixed death benefit, health insurance reimburses or pays for actual covered losses, so it is a contract of indemnity: the insured should be restored to a pre-loss position, never profit from a claim.

The national portion tests three risks that justify the product line. The cost of routine and catastrophic medical care is answered by medical expense insurance. The loss of earned income during disability is answered by disability income insurance. The expense of custodial care is answered by long-term care insurance. This unit focuses on the first.

Morbidity vs Mortality

Life insurance prices on mortality — the probability of death at a given age. Health insurance prices on morbidity — the probability and duration of sickness or injury. Morbidity rates climb with age and explain why health premiums rise steeply for older insureds.

A frequent exam trap reverses these terms. Memorize: morbidity = sickness; mortality = death.

Defining the Insured and the Parties

A health policy distinguishes several parties; questions hinge on the difference.

On a group plan the certificate holder (employee) is the insured; the employer holds the master contract. Eligible dependents include a spouse and children up to age 26 under the ACA, regardless of student, residency, or marital status.

Insurable interest must exist at the time of application (not at the time of loss, as in property insurance). An applicant has insurable interest in their own health and in the health of close family members. This rule blocks wagering and limits moral hazard.

Perils, Hazards, and Adverse Selection

• Peril — the cause of loss (illness, accident).
• Hazard — a condition that increases the chance or severity of loss. Physical hazard = a chronic bad back; moral hazard = lying on an application; morale hazard = carelessness because one is insured.
• Risk — uncertainty of loss; insurers accept only pure risk (loss or no loss), never speculative risk.

Unhealthy people seek coverage more aggressively than healthy people. Insurers fight this adverse selection with underwriting, pre-existing condition provisions, probationary periods, and — on group plans — participation requirements (commonly 75% of eligible employees on contributory plans).

A trap: the ACA eliminated pre-existing condition exclusions on individual and small-group major medical, but such exclusions still appear on excepted-benefit and short-term limited-duration plans.

Sources of Coverage and Renewability

Place every policy in one of three buckets: group (employer/association master contract with certificates and simplified underwriting), individual (purchased directly; ACA-compliant major medical is now guaranteed-issue), or government (Medicare, Medicaid, TRICARE/CHAMPVA, workers' compensation).

Renewability provisions control how easily an insurer can cancel or re-rate, ranked most-to-least favorable to the insured:

Watch the trap: noncancelable locks the renewal and the premium, while guaranteed renewable locks only the renewal — the insurer may still raise rates for an entire class. Likewise, do not confuse pure indemnity (reimburse actual expense) with fixed-benefit products such as a hospital indemnity policy, which pays a stated dollar amount per day regardless of actual charges.

Probationary and Elimination Periods

Two time-based provisions limit early or short claims and recur on the exam:

• A probationary period (also called a waiting period) is the time after a policy is issued before coverage for sickness begins — commonly 10–30 days. Accidents are typically covered from day one; only illness is delayed. This guards against someone buying coverage while already sick.
• An elimination period is a deductible measured in time rather than dollars, used mainly on disability income and long-term care: benefits begin only after the insured has been disabled for the stated number of days (e.g., 30, 60, 90). A longer elimination period lowers the premium because the insurer pays fewer claims and starts later.

Do not confuse the two. The probationary period runs once, at policy inception, and applies to sickness. The elimination period applies to each qualifying claim and delays the start of benefits. A 90-day elimination period on a disability policy means no benefit is paid for the first 90 days of every covered disability, after which payments begin.