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Health Insurance Explained: How age impacts your insurance costs

Written by: Nick Green
December 17, 2020 at 4:00 PM

The Affordable Care Act was signed into law almost 11 years ago, but there’s still confusion about how health insurance premiums are calculated. Health insurance is famously difficult and confusing to shop for, and our support team is constantly getting questions about which plan someone should choose.

We want to help clear things up. Read on to learn how your health insurance premium is calculated and what role your age plays in the calculation.

What can be used to determine your premium

Your age is one of the few factors that individual and small group health insurance companies can use to charge you a different premium than someone else, and it’s also the most impactful. The others are:

  • your smoking status (allows insurers to charge up to 50% more),
  • your health insurance rating area based on where you live,
  • the metal tier of the plan you choose (bronze, silver, gold, platinum, and catastrophic), and
  • the number of people covered under the plan.

Some factors that aren’t allowed to be used to charge you a different premium amount are:

  • your current health,
  • your medical history,
  • any pre-existing conditions, or
  • your sex.

How age affects your health insurance premium

In an insurance company’s eyes, your age helps estimate how much you’ll use your plan. Since they pay money when a customer uses their plan, it makes sense to charge people more if they are more likely to use their plan and less if they aren’t. The extra money in premiums helps pay for the extra healthcare older customers are more likely to need.

But there’s a limit to how much more they can charge you based on your age. Federal rules were put in place to make sure insurance companies weren’t able to price gouge older adults to cover the increased costs to insure them, leading to higher numbers going uninsured.

The rule states that anyone 64 or older cannot be charged more than three times the base rate, which is the premium for a 21-year-old. Children under the age of 21 are only charged a fraction of the base rate since they’re less risky.

Federal age curve

As you can see from the graph, premiums start to exponentially increase once you hit your mid-forties. At 46, insurance companies can charge you 1.5x the base rate. From there, it only takes 18 more years to get to the maximum allowable multiple of 3x. A lot of data analysis went into creating these premium multiples, and the graph illustrates how much more likely older adults are to need healthcare.

State-specific variations to the health insurance age curve

While many states decide to use the federal premium age curve, some want to set their own rules. They’re not allowed to increase the overall premium multiple above 3x for the oldest people in their state, but they can lessen the gap between the premiums paid by the youngest and oldest people in their state or change the multiples for each age. While this makes premiums more equal, it also means younger people will be paying more than they would elsewhere while older people will be paying less.

  • Utah, where PeopleKeep is located, doesn’t make any changes to the overall gap between the lowest and highest premiums—that’s still 3x—but they do change the multiples for each age, tending to be more aggressive. Instead of starting the 3x multiplier at age 64, Utah starts it at 59. Utah also hits the 1.5x multiplier five years before the federal age curve. Children aged 0-20 are lumped into the same multiplier of 0.793x instead of being broken up from 0-14 at one multiplier and individual multipliers for 15-20.
  • Minnesota is similar to Utah in that they lump all children from 0-20 into the same multiple, but their multiple is higher at 0.89x. After the age of 21, Minnesota’s age curve roughly mirrors the federal age curve.
  • Alabama, Mississippi, and Oregon have made health insurance more affordable for children. All three states lump children from 0-20 into the same multiple, 0.635x. In contrast, the federal age curve starts at 0.765x for children aged 0-14 and goes up to 0.97x for 20-year-olds. From 21 on, all three states use the federal age curve to determine premium multiples.
  • Massachusetts narrows the gap between their youngest and oldest residents by implementing a maximum premium multiple of 2.365x. Like some other states on this list, they lump children from 0-20 into the same group, but Massachusetts uses a multiple of 0.751x. Unlike any other state, Massachusetts doesn’t use a multiple of 1x for 21-year-old residents. Instead, they lump residents from 21-26 into the same group at a multiple of 1.183x.
  • The District of Columbia operates similarly to Massachusetts by lowering the highest premium multiple for their oldest residents. The difference is that D.C.’s multiple is even lower, at 2.181x. They also have a lower premium multiple for children from 0-20 at 0.654x. One of the biggest differences between D.C. and other states is that residents don’t reach a multiple of 1x until age 41. That means everyone under the age of 41 is paying relatively less than the rate of a 21-year-old in other states.
  • New York and Vermont don’t allow any variation in premiums based on age. Everyone pays the same premium regardless of their age, sex, and current health or medical history. This leads to younger residents paying relatively more and older citizens paying relatively less when compared to other states.

Want to know more about health insurance in your state? See our state-by-state guide to open enrollment

How older people can get help with their higher premiums

Now that you know how age affects your health insurance premium, you might be wondering if there is any way to help older people pay their higher premiums.

Premium tax credits are one form of assistance that can be used to help pay for insurance premiums. These tax credits are available to anyone who purchases a plan on the health insurance marketplace as long as your household income is below a certain threshold. The Kaiser Family Foundation put together a calculator to help estimate the amount of tax credits you’d be eligible for based on a number of factors.

The thing about tax credits is that they don’t scale by age. Older people won’t necessarily receive a higher tax credit since eligibility is based on household income. If you make too much money, you won’t qualify for tax credits at all.

Another option is a health benefit called the individual coverage health reimbursement arrangement, or ICHRA for short. Using an ICHRA, employers offer employees allowances that are used to reimburse employees tax-free for their health insurance premiums and other qualified healthcare expenses.

These allowances can be scaled based on an employee’s age, with the oldest employees being eligible to receive up to three times the allowance of the youngest employees. The result is similar to the age curves, only employers get to control the floor and ceiling of the benefit. This option takes an older employee’s increased costs into account and is a great way to help them pay for the healthcare they need.

To learn more, download our guide to offering an ICHRA

Conclusion

Your age is the most important factor in determining your health insurance premium, but insurance companies also consider your smoking status and location in addition to the metal tier of the plan you choose and how many people will be covered. In most states, older people pay three times as much as a 21-year-old for their premium. The most effective way to help older people pay for this increase in cost is for employers to implement an ICHRA, which lets employers give their older employees more money than their younger employees to pay for their premiums and healthcare expenses.

Topics: Health Insurance, Premiums

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