Short-Term Health Insurance—What It Is & How It Works

A patient hands over a health insurance card.
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While the Affordable Care Act has ushered in an era of major-medical health insurance available to most people in the United States, there’s still a role for short-term health insurance for those without a major medical plan.

What Is Short-Term Health Insurance?

Short-term health insurance provides coverage for periods from 30 days to six months. It’s generally used as a stop-gap measure to prevent being totally uninsured while you’re between major medical policies.

You might use it while between jobs, while waiting for open enrollment on your state’s health insurance exchange, after you’ve enrolled in a major medical plan but you’re waiting for that plan to take effect, or to bridge a few months between retirement and Medicare. Short-term policies aren’t renewable; you’re covered only for the stated time frame, and then the coverage ends.

There is no open enrollment period for short-term health insurance; you may apply for a policy at any time. However, since short-term health insurance policies don’t have to comply with the ACA, your policy will be subject to underwriting. Not only does this mean you might be refused a policy if you’re a bad risk, it also means the policy you’re offered may exclude pre-existing conditions and have a maximum pay-out limit to the benefits.

Short-term health insurance doesn’t have to cover all of the ACA’s essential health benefits.

For example, it might not offer preventive care, maternity care, or mental health benefits. If you want to get your yearly physical exam while covered by a short-term health insurance policy, you’ll likely have to pay for it out-of-pocket.

Because short-term health insurance generally has more restrictive benefits and insurers can limit their risks with good underwriting, these policies can be less expensive than major medical plans.

However, if you’re used to getting subsidized health insurance, either because your employer has been paying part of your health insurance premiums or because you’ve gotten an ACA health insurance subsidy on your state’s health insurance exchange, the lower premiums may not be readily apparent to you.

In addition to choosing a policy duration between 30 days and six months, you may be able to choose from among several options for cost-sharing. For example, you might choose a low deductible and low coinsurance option that would come with a higher premium, or opt for a higher deductible option but pay a lower premium.

When choosing your cost-sharing options, read the plan description carefully and make sure you understand exactly how the cost-sharing works. For instance, since short-term plans aren’t valid for an entire year, many don’t have the annual deductible you’re used to with most major medical plans. Some will have a one-time deductible, while others will have an episodic deductible, meaning that you pay the deductible each time you get care. Learn more about how different types of deductibles work.

Lastly, if you’re a legal resident of the United States, don’t forget to add the cost of the shared responsibility payment tax penalty to your health insurance budget.

Since short-term health insurance policies don’t satisfy the ACA’s individual mandate to have health insurance, you may be required to pay a tax penalty for being uninsured even though you have a short-term policy.

You can be uninsured for a single episode of up to three months without having to pay the penalty, but if you’re without ACA-compliant health insurance for longer than three months, you’ll have to either find an exemption, or pay the tax penalty. For 2015, the penalty can be up to 2 percent of your income or $325, whichever is greater. In 2016, the penalty amount increases to $695 or 2.5 percent of your income.

If you’re only uninsured for part of the year, the penalty is prorated on a monthly basis. For example, if you had job-based major-medical insurance for 7 months of the year followed by short-term health insurance for 5 months of the year, you’d only be considered uninsured for 5 months. Your penalty would be prorated to 5/12 of the annual penalty amount.

Learn more about the tax penalty for being uninsured:

Pros & Cons

Learn more about the pros and cons of short-term health insurance in the United States in:

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