If you or a family member has ever been sick or injured, you know how important it is to have health coverage. But if you're confused about what kind is best for you, you're not alone.

Health insurance is one of the components of a sound financial plan. It provides financial security for your family by providing financial resources for health expenses in times of life's uncertainties.

Most people, especially with dependents, need health insurance. To determine how much health insurance you need, start by considering the typical medical expenses you and your family incur (i.e., doctor visits, medical tests, prescriptions). Don't forget to plan for the unexpected.

Indemnity

With an indemnity plan (sometimes called fee-for-service), you can use any medical provider (such as a doctor and hospital). You, or they, send the bill to the insurance company, which pays part of the cost. Usually you have a deductible, which is the amount of the covered expenses you must pay each year before the insurer starts to reimburse you -- such as $200 or $250.

Once you meet the deductible, most indemnity plans pay a percentage of what they consider the usual and customary charge for covered services. The insurer generally pays 80 percent of the usual and customary costs and you pay the other 20 percent, which is known as coinsurance. If the provider charges more than the usual and customary rates, you will have to pay both the coinsurance and the excess charges.

For example, if the usual and customary fee for a medical service is $100, the insurer will pay $80, or 80 percent, of the covered charge and you will pay the rest. If your doctor charges $100, you pay $20; but if your doctor charges over the usual and customary fee, say $105, you pay the excess, or $25. Note that many fee-for-service plans reimburse at the 80/20 level as described above; however, plans which have 70/30 reimbursements are also available.

Policies typically have an out-of-pocket maximum. This means that once your covered expenses reach a certain amount in a given calendar year, the usual and customary fee for covered benefits will be paid in full by the insurer, and you no longer pay the coinsurance. (If your doctor bills you more than the usual customary charge, again you may still have to pay a portion of the bill.)

There also may be lifetime limits on benefits paid under the policy. Most experts recommend that you look for a policy whose lifetime limit is at least $1 million. Anything less may prove to be inadequate.

Managed Care

Managed care plans generally provide comprehensive health services to their members and offer financial incentives for patients to use the providers who belong to the plan. There are three major types of managed care plans: health maintenance organizations (HMOs), point-of-service (POS) plans, and preferred provider organizations (PPOs).

HMO

HMOs are the oldest form of managed care plan. In an HMO, instead of paying for each service that you receive separately, your coverage is paid in advance. This is called prepaid care. For a set monthly fee, HMOs offer members a range of health benefits, including preventive care, but typically care must be authorized by your primary care physician.

HMOs will give you a list of doctors from which to choose a primary care physician. This doctor coordinates your care, which means that generally you must contact him or her to be referred to any specialist. This is often called physician-directed care, as self referrals to specialists or unauthorized care is not covered. Typically, with most HMOs there is a copayment for office visits, hospitalizations, and other health services.

POS

Many HMOs offer plan members the option to self direct care, as one would under an indemnity or PPO plan, rather than get referrals from primary care physicians. An HMO with this opt-out provision is known as a point-of-service (POS) plan. How the plan functions (i.e., like an HMO or like an indemnity plan) depends on whether individual plan members use their primary care physician or self direct their care at the "point of service."

To illustrate this point, this is how these plans typically work. When medical care is needed, the individual plan member essentially has up to two or three choices, depending on the particular health plan. The plan member can choose to go through his or her primary care physician, in which case services will be covered under HMO guidelines (i.e., usually a copayment will be required). Alternatively, the plan member can access care through a PPO provider and the services will be covered under in-network PPO rules (i.e., usually a copayment and coinsurance will be required). Lastly, if the plan member chooses to obtain services from a provider outside of the HMO and PPO networks, the services will be reimbursed according to out-of-network rules (i.e., usually a copayment and higher coinsurance charge will be required). Because people who belong to POS plans are responsible for deciding how to access care within the various options, it is important that they understand the financial implications of these choices.

PPO

A PPO is the form of managed care closest to an indemnity plan. A PPO negotiates discounts with doctors, hospitals, and other providers of care who will accept lower fees from the insurer for their services. As a result, the premiums are lower because some of the provider payments will be discounted.

If you go to a doctor within the PPO network, you will pay a copayment (a set amount you pay for certain services -- say, $10 for a doctor, or $5 for a prescription). In addition, your coinsurance will be based on the negotiated discounted charges for PPO members. For example, the insurer may reimburse you for 90 percent of the cost if you go to a provider within the network. If you choose to go a provider out of the network, the insurer might only reimburse you for, say, 70 percent of the cost. In addition, with an out-of-network provider, you may have to pay the difference between what the provider charges and what the plan will recognize as a reasonable charge.

Another characteristic of PPOs is the ability to make self referrals. In essence, plan members can refer themselves to doctors of their choice, including specialists inside and outside the PPO network. However, as described above, plan members may incur higher copayments for using out-of-network providers.