There are many different choices for medical insurance, and choosing the right one for you will depend on your household's financial and medical situation. Knowing more about the different options in health insurance that are out there can help you get informed and make the best decision for you. Here, we will take a look at high deductible health plans and the pros and cons of choosing one.
What Is a High Deductible Health Plan?
As its name suggests, a high deductible health plan (HDHP) is a health insurance plan that comes with a higher deductible than a traditional plan. Generally, with a HDHP, you have lower monthly premiums but have to pay for a higher amount of your own medical care before insurance kicks in.
The IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. There are also guidelines for the maximum yearly out-of-pocket expenses with an HDHP that are adjusted for inflation by the IRS. There is a maximum out-of-pocket expense of $7,050 for an individual or $14,100 for a family for in-network expenses in 2022.
How Does a High Deductible Health Plan Work?
A high deductible health plan differs from a more traditional health plan in a few key areas. First of all, it comes with a higher annual deductible. This means that you will be responsible to pay out-of-pocket for more of your medical expenses. Most HDHPs will completely cover preventative care (annual physicals, vaccinations, etc.) without copays, but any other medical expenses will not be covered until you reach your deductible.
Instead, you can take advantage of the lower monthly premiums and access to a tax-free Health Savings Account (HSA) to pay for these medical expenses. So instead of paying a higher monthly premium, you can instead put much of that money into an HSA. Your HSA contributions are tax-deductible, and the earnings grow tax-free. Plus, if you withdraw the funds for qualifying medical expenses, they are also tax-free when you take them out. For white coat investors, an HSA, which is basically a triple tax-free account, is awfully advantageous (and it could end up being your favorite investing account).
What Are the Benefits of a High Deductible Health Plan?
There are a couple of big benefits to a high deductible health plan. The first is that the monthly premiums are lower than those of a traditional health plan. If you are a relatively healthy person who mostly needs health insurance in case of a catastrophic occurrence, it can make a lot of sense to minimize your monthly premiums. Your preventative care is still covered, and you can invest the money you save from lower premiums into your Health Savings Account.
Even if you anticipate some medical expenses, you may still be better off with a high deductible health plan. Many insurance companies provide a calculator or estimator where you can approximate your expenses for the year. You can then compare your total cost between various health insurance options, including premiums, co-pays, and other expenses.
What Are the Disadvantages of a High Deductible Health Plan?
The big disadvantage of a high deductible health plan is that you are on the hook for more of your own medical expenses each year before you reach your deductible. Depending on the details of your insurance plans and how many medical expenses you end up having, that could be thousands or several thousands of dollars. And you have to choose your insurance plan BEFORE you know exactly how much medical care you'll need.
Should I Get a High Deductible Health Plan?
Whether you should get a high deductible health plan will depend on your household situation and how healthy you are. Since you won't know your exact amount of medical expenses before you have to choose what type of health plan you want, choosing whether to get an HDHP is a bit of guesswork.
Take a look at your annual medical expenses for the past several years. Your current insurance company may be able to provide you with this information. Using your past history as a guide, review any upcoming medical plans that you might have. Are there any planned surgeries, pregnancies, or other medical expenses that might affect your total medical expenses for the year?
Once you have that information, look at the different health insurance plans that you have available. Using your estimated yearly medical expenses as a guide, determine which one will give you the lowest overall cost throughout the year. You'll also want to make sure that you are comfortable with the total out-of-pocket maximum amount for the plan that you choose.
Whatever you do, don't get a high deductible health plan JUST to get an HSA. Choose the right plan first. Then, if that plan is an HDHP, be sure to use an HSA you now have a right to use.
Should I Choose a High Deductible Health Plan with an HSA?
If you do choose a high deductible health plan, you'll definitely want to set up a Health Savings Account (HSA). Having an HSA is the major benefit to enrolling in an HDHP. You can use the money that you save with the lower premiums of the high deductible health plan and keep them in your HSA. Any contributions are tax-deductible, and as long as you use the money for qualifying medical expenses, withdrawals are tax-free as well (even if it's years later). Many employers also contribute to their employees' HSAs. Unlike Flexible Spending Accounts (FSAs), you don't have a deadline to use the funds in your HSA—if you don't use the money in one year, you can continue to roll it over to the next year.
Are High Deductible Health Plans Worth It?
Whether a high deductible health plan is worth it for you will depend on your own specific health and financial situation, but there's no denying that they have become very popular. Many people find that the combination of lower medical premiums and the HSA's tax advantages end up providing a lower total cost of medical care. Crunch the numbers yourself to see if a high deductible health plan and HSA are the right choices for you.
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