Spend Less, Save More: Consider High Deductible Health Plans
While it may sound counterintuitive, a high deductible health plan could be one of the best ways to pay less for your health insurance. This type of insurance is ideal for many people who have both the funds and the favorable health to make the unique perks of these insurance policies work for them.
Let’s explain: A high deductible health plan is a health insurance plan that has a higher minimum deductible for medical expenses. Your deductible is the part of your insurance claim that you have to pay yourself, out-of-pocket. When you have paid your deductible, the insurance provider will cover the rest, as set out in your contract.
The logic is that high deductible health insurance plans not only lower insurance premiums but also encourage people to be more aware of their medical expenses. Of course, this sort of health insurance plan is not for everyone. It’s designed to benefit people who have money to pay those deductibles, who are in good health, and who only want insurance in case of serious and sustained medical issues.
Another perk of this plan: high deductible health insurance plans offer access to a tax-advantaged Health Savings Account (HSA) and are in fact the only way to qualify for this kind of account. An HSA is a triple tax shelter that allows you to contribute tax-deferred contributions which you can use to pay for qualified medical expenses not covered by your HDHP. Think of it as a 401k for your health care.
High deductible health plans have an annual maximum limit on out-of-pocket expenses for covered services from in-network providers. (In-network providers are health care providers that have a contract with your insurance company to accept specific discounted rates.) To give you a rough idea of this maximum limit, in 2020, it was $6,900 for an individual and $13,800 for a family. So, what does this mean, exactly?
It means you or your family has to pay this amount before your plan will pay 100% of your health expenses for in-network care.
How Does a High Deductible Health Plan Work?
Building on what we’ve already learned about high deductible health plan coverage, let’s get into how this kind of health insurance actually works.
In order to qualify as a high deductible health plan and to reap the rewards of its benefits, the IRS establishes both minimum deductibles and maximum out-of-pocket expenses. We’ve already given you an overview of the maximum limit for 2020 so you have a rough idea of what you can expect to pay until your provider pays all of your in-network health care costs.
The minimum deductible for 2020 was set at $1,400 for an individual and $2,800 for a family. So, this is approximately what you are going to have to pay before your coverage even kicks-in. (Just keep in mind these numbers are subject to change annually but don’t generally vary too much from the previous year.)
The great thing about high deductible health plan options is that while they do not cover more mundane medical costs like doctor’s visits, trips to the ER, and prescriptions, they are designed to protect you against serious catastrophes like a major accident or serious diagnoses that could otherwise bankrupt you. And because your insurance plan is not covering all the little things, your premium is lower and you can easily make up for having to pay a higher deductible, which is often close or equal to your maximum out-of-pocket limit anyway.
The takeaway is that even though you will have to pay a sizeable chunk of the costs for a serious medical issue out-of-pocket if you haven’t reached your maximum limit, thanks to lower premiums, you are more likely to be able to afford the expense—particularly if you’ve taken advantage of the HSA.
Benefits of an HSA
A Health Savings Account has many amazing benefits for people looking to grow their money.
- The money you save in the HSA can be used toward any qualified medical expenses.
- Any funds you save in your HSA goes in pre-tax.
- The money in your HSA can be invested and it will grow tax-free.
- If your employer offers a high deductible health plan with an HSA as a benefit will usually include a matching employer contribution, which is an incredible way to increase your investment for free.
- Any money withdrawn for medical expenses is tax-free.
- HSA funds roll over each year so you won’t lose your money.
- After you retire, your HSA works like a conventional IRA and you can use your money on whatever you’d like. Any qualified medical expenses will continue to be tax-free and—just like a 401k—non-qualifying expenses will be taxed as income.
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Benefits of High Deductible Health Plan
We’ve already touched on some of the advantages of high deductible health plans but let’s recap and get into more perks of this kind of health plan.
It bears repeating that when you choosing a high deductible health plan, your premiums drop substantially. So, if you were paying $500 dollars a month for a family plan with a $500 deductible, a high-deductible insurance policy could drop that payment to $150 and save you $350 per month and upwards of $4,000 per year.
It gets better because these savings only reflect what you’ll bank if you meet your deductible: if you stay healthy and spend very little on medical expenses, then you could say thousands of dollars more. None of this even factors in the cash-advantages of also having an HSA.
Other benefits of high deductible health plan include:
- Gives you the option to start an HSA to offset the higher deductible
- An HSA gives you three tax shelters
- Your plan will cover you FULLY once you reach your maximum out-of-pocket limit each (and this limit is often close or equal to the deductible).
Is a High Deductible Health Plan the Right Choice for You?
Ultimately, we want to help you make the best decision for your life and your unique situation which means we cannot give you a standard answer to that question—but we can help you answer it for yourself.
High deductible health plans are a great choice for many, but certainly not everyone. Before you get a plan, consider these questions.
- Do you have any other options? This isn’t to say you shouldn’t get a high deductible health plan, but if you have other coverage (for example, employee or spousal benefits), you should run some numbers to see if this plan will actually save you anything over the course of a typical month or year.
- Are you healthy? How about your family members? High deductible health insurance plans work best for people who are in generally good health since they don’t cover trips to the doctor’s office. If you or a family member has a chronic health condition like heart disease or diabetes, for instance, traditional health insurance with higher monthly premiums is likely the best choice.
- Do you have a big family? Smaller families are better suited to a high deductible health insurance plans because larger families will quickly eat up the deductible. This said, big families can be excellent candidates for a high deductible health plan if they combine this insurance with an HSA and those excellent tax perks.
Answering these questions will give you a good idea if a high deductible health plan is right for you. Regardless of whether it is or it isn’t, the relatively little time you’ve spent educating yourself about this potentially profitably insurance coverage is unquestionably worth it. After all, if you don’t explore the options, you’ll never know if you’re making the right choice.
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