Understanding Health Insurance

What happens to health insurance when turning 26?

• If grown children already have their own health insurance (e.g., provided by their employer) and are not covered under a parent’s policy, nothing changes when turning 26
• However, if grown children are covered as a dependent on a parent’s health insurance policy, the insurer is no longer required to extend coverage to them after they turn 26
• Grown children then generally have two options for getting their own health insurance:
  • Enroll in a plan provided by their employer, or
  • Purchase a policy in the private insurance marketplace
• Depending on their level of income, government subsidies (in the form of tax credits) may be available if they purchase health insurance in the private insurance marketplace

Action Steps: How can one get covered?

• If grown children (or a spouse) work for an employer that provides employees access to a health insurance plan, enrolling in the company plan is generally the easiest way to continue coverage
• If they do not have access to an employer plan, or if they prefer to purchase a different policy, they can compare policies using their state’s health insurance exchange
  • For an overview of exchanges by state, visit https://www.healthcare.gov/marketplace-in-your-state/
• There is a special enrollment period that begins 60 days prior to and ends 60 days after their 26th birthday
• Now that they will be responsible for their own insurance, grown children should consider other ways to plan for healthcare expenses, such as contributing to a triple tax-advantaged Health Savings Account (if eligible) or participating in an employer-sponsored Healthcare Flexible Spending Account (if offered)

Why buy health insurance?

• The most important reason to buy health insurance is that healthcare is expensive; even young, healthy people still need to go to the doctor sometimes, and everyone is susceptible to medical emergencies
  • Imagine a car accident puts the victim in the hospital for three days with a broken leg. Without insurance, the government estimates that might cost $37,500
  • The average premium and deductible cost for the benchmark insurance plan sold in the state exchange is about $10,000/year—almost four times less expensive (assuming no coinsurance and complete coverage)
• Also, under the Affordable Care Act’s “individual mandate”, one is probably required to maintain some health insurance
  • The government may enforce the individual mandate via a penalty tax that is intended to cost roughly what you would otherwise spend on insurance; either you maintain adequate coverage, or you must pay this tax
  • The individual mandate is currently toothless, because in 2017 Congress and the then President set the penalty tax rate to 0%. However, a future Congress and President could very well reinstate the penalty, so it should not be dismissed

Source: Healthcare.gov, Why bother with health insurance? https://www.healthcare.gov/young-adults/ready-to-apply/

Supporting Information

Last Reviewed: 11/04/2024

Key Sources

• Healthcare.gov – Getting Covered If You’re Under 30
• Healthcare.gov – How to Pick a Health Insurance Plan
• I.R.S. – Instructions for Form 8962 (Premium Tax Credit)