"Dear Mr. Wild: Thank you for applying for DirectBlue Individual Preferred-Provider healthcare coverage," the note began ominously. "We are sorry to inform you that your application does not meet our medical underwriting criteria for approval."

I cringed. My COBRA plan, you see, is soon to expire, and I need health insurance. Still fairly fresh from divorce, and having recently made a midlife career change, I'm not exactly flush with cash. In my hands, the letter felt like splintered glass.

THE DILEMMA

As private health insurance premiums soar--up 11.2% in 2004 and 13.9% in 2003--people like me are scrambling to find affordable coverage and coming up empty. The premium for an average family is now about $10,000 a year--considerably more than many can comfortably handle. A recent poll from the Kaiser Family Foundation found that having to pay for healthcare and health insurance is now the No. 1 fear in America, more terrifying, even, than terrorism. (See "Fear Factors" chart, below.)

A recent Harvard University study revealed that illness and medical bills were to blame for more than half of all recent personal bankruptcies. Shockingly, about three-quarters of those bankrupted by illness had health insurance--just not enough. As my cousin, a 58-year-old Los Angeles psychotherapist with heart disease, said to me about his ongoing and never-ending co-pays, "20% of infinity is still a mountain of money."

I don't have heart disease. But I do have sleep apnea. For reasons unknown my throat tightens at night, resulting in blockage in my airway. After a few seconds without oxygen, my brain jolts me from deep sleep to semi-wakefulness so I won't suffocate. Untreated, all those semi-awakenings would leave me rag tired and would eventually wallop my health. But I do treat it. I sleep with a CPAP machine, a toaster-size pump that blows air down my throat and keeps the airway open. It is the gold standard of treatment for sleep apnea, and thanks to my CPAP, I sleep about as well as the next guy. Got that, Blue Shield?

The company did offer me an alternative: their "Plan B," which requires no evaluation of medical history. The premiums are high; the coverage is pathetic. It's the same plan they offered an acquaintance of mine because he admitted to occasional heartburn. Another man I know got rejected because--I kid you not--he was in marital therapy.

At this point, I must digress a bit to mention that HighMark Blue Shield is one of several "Blue" plans in my home state of Pennsylvania. Nonprofit institutions, they receive succulent tax breaks. In exchange, they are supposed to serve the public good. But lately the Pennsylvania Blues have come under attack for their executives' six-figure salaries and other perks that include pricey golf club memberships and martini lunches. You tee me off, Blue Shield. The entire state of health insurance in America tees me off. But it isn't something I can ignore--nor can any of us as financial planners.

"Health insurance is more important a financial issue than ever before. Increasingly it is becoming a decisive factor in whether or not people can retire," says Melissa Hammel, CFP and a principal of the Hammel Financial Advisory Group, a fee-only firm in Brentwood, Tenn., with $92 million in assets under management. "I see it as my fiduciary duty to look very carefully at health insurance as part of any comprehensive financial plan."

Unfortunately, as Hammel points out, looking at health insurance is not like looking at term life insurance. It's complicated. Ken Zahn, CFP, who has practiced financial planning for 30 years and has trained over 4,000 people for the CFP exam, says that not only is health insurance complicated, but few financial planners have a grasp on the basics. "We are still in the Stone Age," he argues. "Many financial planners I encounter don't even know the bare-bones essentials of health insurance."

HEALTH INSURANCE SHOPPING TIPS

If any good has come out of my recent dilemma, it is that I've had to learn not only the essentials, but many of the finer points of navigating the health insurance system. Here are some tidbits that should come in handy, whether shopping for yourself or helping clients:

Pick a category. The two major forms of healthcare insurance today are preferred provider organizations (PPOs) and health maintenance organizations (HMOs). The HMO offers all-inclusive healthcare for a set amount of money. It is the ultimate in simplicity. If you pay anything beyond the basic premium, it will be nominal. As a subscriber, however, you must use the HMO's in-house docs. PPOs, in contrast, will charge you a monthly premium, and there will also be deductibles and co-pays. In general, the greater the co-pays and deductibles, the less the premiums. Subscribers will typically have a choice of seeing "in-network" or "out-of-network" physicians. The "out-of-network" choices will cost more.

Narrow your options. A first step in choosing an insurance plan is to ask yourself if you like your current doctor, says Curt F. Fey, CFA, CFP and a fee-only planner in Pittsford, N.Y. "Do you want to keep your current physician? If so, that will limit your options."

Can you be managed? Next, you might want to ask yourself if you're an HMO kind of person. HMOs are simple and easy, but they aren't for everyone, says Dante Benecivenga, an independent insurance agent in Southfield, Mich., specializing in health insurance. "Belonging to an HMO means that many of your heath decisions are made for you, including the doctor that you will see."

Find a good broker. Once you have some kind of idea what kind of plan you're looking for, bring in a professional to help you comparison shop. "Choose a broker who has lots of experience and works with many companies," Benecivenga says. A good broker, he says, will know where the best deals are, and he or she will know which companies offer the best--and worst--service. "Some insurance providers are just simple pains-in-the-ass," Benecivenga says.

Avoid the pen. Most insurance applications ask if you've ever been turned down by any other insurance company. If you reply "yes," you may be turned down simply by virtue of having been turned down, Fey says. "If you have any health problems at all, don't apply in writing," he advises. "Talk to an agent first and ask if you are likely to be accepted." (Yeah, I should have done that.)

Choose your formula. When picking a PPO, you'll need to decide how large a deductible and how big a co-pay you want. "From the insurance firm's point of view, it makes sense to offer the better deals to those people who are willing to pick up the little claims on their own," says Dalibor Nenadov, a CFP with Northern Financial Advisors in Franklin, Mich. "In general, therefore, it will be most economical to go with the larger deductibles and co-pays."

Avoid killer caps. More and more insurance providers are placing lifetime caps on their policies. "Be very careful of lifetime caps. They are there for the benefit of the insurance carrier, not your client," says Keith Newcomb, who heads Full Life Financial in Nashville, Tenn., and offers hourly consulting to clients. "The insurance people will tell you that it hardly ever happens that someone's medical bills will surpass the cap--and that may be true--but what if you're the one?" (See "Insurance with Holes," below.)

Consider an HSA. Congress created Health Savings Accounts as part of the Medicare Act of 2003. The HSA, paired with a high-deductible insurance policy, allows you to contribute up to $2,650 a year (with an additional $600 if you're over 55). That money is tax deductible. It can be withdrawn to pay for qualified medical expenses, or you can save and invest it either to use for medical expenses in future years, or to withdraw at age 65 for whatever purpose you wish (although if not used for medical expenses, you'll pay income tax on it).

HSAs may be the wave of the future, but they are not without problems. For one, the frugal may be disinclined to pay out-of-pocket for medical expenses. Critics fear that high-deductible plans may actually result in greater medical bills as Americans shun treatment until their health problems become severe. There's also the delicate problem of where to invest the money.

An HSA "is basically a checking account with high fees," says Jim Snyder, president of Great Lakes HSA, a full-service HSA administration company in Cleveland. Many HSAs will charge you assorted and sundry fees that could easily total $85 a year, even on a very small balance. "Typically, the fees will more than eat up any meager interest you make for the first few years," Snyder says.

Some mutual fund companies are beginning to offer HSA accounts where you might get a bigger bang for your buck. But those, too, tend to have high fees. And the wisdom of investing medical money in a volatile stock market is questionable.

The best you can do for now, Snyder says, is to shop around. Great Lakes HSA (www.greatlakeshsa.com), his own firm, charges a modest annual fee of $25. "When you set up your high-deductible policy, the insurance company will often try to steer you toward a particular bank. But you don't have to go there," Snyder says. "You can go anywhere to set up an HSA."

Learn the laws. When Matthew Gelfand, CFA, CFP, a fee-only adviser in Bethesda, Md., sought health insurance for himself, one provider tried taking him for a chump. "They told me that they would never cover any skeletal problems I might develop in the future, all because of an old sports injury," Gelfand recalls.

But he did some digging and learned about the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which offers certain protections for those switching insurance plans. In general, provided there has been no break in coverage, the maximum length of a pre-existing condition exclusion period is 12 months after your enrollment date. And the only pre-existing conditions that can be excluded are those for which medical advice, diagnosis or treatment was recommended or received within the 6-month period before your enrollment date.

Handle COBRA with care. Thanks to the Consolidated Omnibus Budget Reconciliation Act of 1986, if you lose your job you can take your health insurance with you, provided that you pay for it on your own, for up to 18 months. If you are covered under a spouse's plan and you divorce, you have three years.

Although it's nice to have options, there are reasons that relying on COBRA can be a mistake.

• If you are in relatively good health, an individual plan may be less expensive than buying into an ex-employer's or ex-spouse's group plan. Some group plans have high premiums owing to the unique medical situations of a few members of the group.
• In 18 months, you'll be older and possibly in poorer health. It may be wise to shop for your own health insurance sooner rather than later.
• Serendipitously, I learned that waiting until the last minute to get off COBRA can sting. Say you see the doctor and he decides, since you are about to turn 50 (as I am) that you really should have a certain routine test, such as a colonoscopy (approximate cost, $1,500). Once the doc scribbles that recommendation in your file, no insurance company will accept you without a waiver. It's like a pre-existing condition, with no condition.

Fortunately, I still have a little time before my COBRA runs out. Taking everything into consideration, I'm leaning toward a high-deductible PPO with an HSA. That's what seems best for me. For you and for your clients, you'll need to do some serious legwork.

Russell Wild is a financial journalist and a fee-only investment adviser based in Allentown, Pa.