The grim reality is that throughout life, illnesses and accidents occur. They often occur more often as we get older. While it is always best to take good physical care of oneself, some illnesses and accidents can’t be avoided. Treatment for the illnesses and injuries costs money, and often lots of it. That is what health insurance is all about: to shift some of the cost of the expenses to an insurance company.

We have already discussed one variety of health insurance plan for seniors who are not yet ready for Medicare or who, for some other reason, opt not to participate yet: “fee for service” plans. These are available to people of other ages, too, and are typically more costly than other health plan designs, like Health Maintenance Organizations (HMO’s).

We will discuss other forms of health insurance, but at this point, you need information to keep you safe in buying any type.

Life and Career Changes

Many seniors retire from a job or career but are not ready to retire from the working world. Perhaps it is time to start again, maybe in a new field, maybe by working for oneself.

You probably recognize that you need health insurance for yourself, your spouse and maybe for children who remain at home or dependent upon you. But, in your previous life, a Human Resources specialist may have been there to take care of the details of your health insurance package if you worked for a company that offered it. There may not have been many choices for health insurance. In fact, there may have been only the traditional fee-for-service plan. At that, you may only be familiar with using it; certainly not with buying it.

Dangers Lurk

There are “bad guys” in every business and industry. Insurance is no exception. The insurance bad guys realize that health insurance is complex and that most people do not understand important aspects of it. They also realize that it can be expensive, particularly for individual (as distinct from group) health insurance.

What You Must Understand

To issue insurance policies in a state, an insurance company must be licensed by the insurance department; each state has one. Some states call a “licensed insurer” an “authorized insurer.” For our purposes, the terms are synonymous.

When an insurance company becomes licensed to issue policies in a state, it submits to the regulation of the state insurance regulatory authority. Insurance regulation extends to:

• The financial stability of the company (its ability to pay claims).
• The amount it charges as premiums (which relates to its claims-paying ability).
• The language of the insurance policy. The reasonability of the premium is determined, in part, by comparing it to the breadth of the benefits provided. Therefore, an insurance regulator is more likely to approve a higher premium for an insurance policy that provides broader coverage and benefits than for one that provides fewer. In part, this is because the policy providing fewer benefits will not generally need to outlay as much money in claims payments per policy.
• The way in which claims are paid. Are there claim denials that are improper despite the terms of the policy? Insurance regulators have the power to punish insurers for wrongful denials of claims.
• Other factors consistent with state law.

Dealing with an unlicensed insurer is extremely dangerous in any situation, but especially so when health insurance is involved. Here’s why:

• If an illness or injury occurs, healthcare costs can become enormous and far beyond an individual’s or a family’s ability to pay. Typically, unlicensed insurers do not collect enough premiums or keep enough money on hand to pay claims.
• Unlicensed Insurers typically accept anyone for a low premium. Their goal is to generate money and take it, without any real intention of paying claims. Related to this, they have very lax, or no, underwriting guidelines. Legitimate insurance companies of all types use underwriting guidelines that are approved by the state insurance regulator. For more about underwriting guidelines, see Underwriting: How Insurance Companies Evaluate Your Application.
• Because the unlicensed insurer has not collected enough money to pay claims or has misappropriated it, claims go unpaid. These entities sometimes pay claims, at first, to appear legitimate, but then, payments stop.
• Health providers may elect not to accept a patient for care if he or she is insured with an unlicensed insurer.
• Unpaid medical bills can adversely affect credit or force bankruptcy.
• Health providers who rendered care believing that insurance existed sustain financial losses due to the non-payment of claims.
• Because the law requires licensure by insurers, the transaction of insurance without one injects criminality into the business of insurance.
• Unlike legitimate insurance companies, unlicensed ones are not covered by state insurance guaranty associations. Legitimate insurers pay into a state guaranty fund so that if the company becomes insolvent and must be liquidated, there is a source of money with which to pay claims in whole or in part. An insurance company liquidation is similar to a bankruptcy and is handled in a very organized way.

How to Protect Yourself

1. Be wary if the premium is significantly lower than that for similar coverage for another company. A bargain price is not a bargain if your claims don’t get paid. If it seems too good to be true, it probably is.
2. Be wary if the so-called insurance is issued by a company that you have never heard of. While you certainly will not recognize the name of every legitimate company, ask questions of the person trying to sell it to you. For example, ask where the company is licensed, whether it is related to another company, and if so, what the other one is. Then, call the other company and find out if it is true.
3. Be wary if only a Post Office Box is provided. Real insurance companies have street addresses.
4. Determine how hard it is to reach the company by phone — if they have a phone at all!
5. Be VERY wary if the so-called insurance is issued by a company that claims that it does not need a state insurance license to issue policies. There are very few exceptions to the licensing requirement.
6. Call your state insurance regulation department (sometimes called the Insurance Commissioner) and ask whether the company is authorized to issue insurance in your state. There will usually be a part of the department called something like “Consumer Services” which is a good place to start. Follow this link to find your state insurance department.

This article has been updated January 2024 since it originally published on April, 2016.