How to Save Money with High Deductible Health Insurance
Learn how to cut your health insurance costs and keep your finances healthy without sacrificing quality care.
Life is unpredictable—that’s why you need the right kinds of insurance to stay safe from unforeseen expenses. One insurance product you should never go without is health insurance. Accidents, emergencies, and illnesses can easily derail your financial goals and dreams if you don’t have health coverage to fall back on. I’ll tell you how a high deductible health plan can save you money so you and your finances stay healthy.
What is a High Deductible Health Plan?
A high deductible health plan (HDHP) is an insurance policy with a higher annual deductible than a typical health policy. A deductible is the amount you have to pay out of pocket each year for covered services and expenses, before your insurance kicks in and pays them for you.
For 2011, to be considered a high deductible health plan, a policy deductible must be between $1,200 and $5,950 if it covers just one person. For family policies, the deductible can be twice that amount, from $2,400 up to $11,900.
Advantages of a High Deductible Health Plan
In exchange for having higher potential out-of-pocket expenses, one benefit you get from choosing a high deductible health plan is paying substantially lower premiums. In other words, the insurance costs less because it doesn’t start paying your medical bills until you’ve met a higher annual deductible.
However, high deductible plans usually provide preventative care benefits—like annual physicals, well-child care, screening services, and immunizations—regardless of the deductible amount. That means they’re automatically covered for you, even if you haven’t met your annual deductible. So having a higher deductible doesn’t necessarily mean that you have to skip important checkups if your budget is tight.
What is a Health Saving Account?
Another huge benefit of having a high deductible health plan is that you qualify to open up and fund a special type of savings account that you can use to pay for healthcare expenses on a tax free basis. It’s called a Health Savings Account (HSA) and you can get one through work or find one on your own at sites like HSAbank.com and depositaccounts.com.
The funds you deposit in a HSA are never taxed as long as they’re used to pay for qualified medical expenses, like deductibles, prescription drugs, dental visits, and eyeglasses. Additionally, any earnings in a HSA are also yours to spend on healthcare tax free!
Think about this: If you spend about $4,000 a year on healthcare and pay an average tax rate of 25%, simply funneling your medical purchases through an HSA saves you $1,000 in taxes each year—that’s nothing to sneeze at!
Check out the long list of qualified medical costs you can pay for using an HSA in IRS Publication 502, Medical and Dental Expensesopens PDF file .
How Much Can You Contribute to a Health Savings Account?
There is an annual limit on how much you and your employer can contribute to a Health Savings Account. As long as you’re covered by a high deductible health plan, you can contribute up to $3,050 if you have single coverage or up to $6,150 if you have a family plan, for 2011.
A unique feature of Health Savings Accounts is that there’s no deadline or requirement to spend money in the account because it simply rolls over from year to year. If you leave your job, your HSA goes with you and you can spend from it if you become uninsured or choose a policy that isn’t a high deductible health plan. However, once you’re no longer covered by a high deductible health plan you can’t make any new contributions to a HSA.
The only downside is that if you withdraw money from a HSA for non-medical expenses (like a vacation) before age 65, you’ll get hit with income tax plus a stiff 20% penalty. After age 65, withdrawals are taxable but there’s no penalty.
Who Should Choose a High Deductible Health Plan?
The low cost and Health Saving Account tax advantages that come with a high deductible health plan sound great—but how do you know if you’d come out ahead by using one? You need to weigh having a potentially higher annual deductible against having guaranteed higher monthly premiums.
Take Emily, a single mom who has a new job with a hotel chain that offers 2 health insurance policies, a traditional and a high deductible plan. The first thing Emily should do is consider the financial worst-case scenario for both options by adding up each plan’s annual premium, deductible, and maximum out-of-pocket expenses.
Let’s say the traditional plan at Emily’s job has a $1,000 deductible and the maximum she could have to pay out-of-pocket for the deductible, premiums, and other expenses totals $6,500 per year. On the other hand, the high deductible plan would require Emily to pay a $3,500 deductible, but the total of all her annual expenses, including the deductible, couldn’t go over $6,000 per year.
So, even though the high deductible plan could require Emily to pay more upfront, on an annual basis, it could still save her $500 a year in the worst-case scenario. Additionally, if she uses an HSA to pay for her qualified medical expenses, she’d have some nice tax savings on top of that. In fact, one of Emily’s workplace benefits is that her employer will make a one-time contribution of $750 to her HSA and then kick in $200 every year after that.
The annual out-of-pocket savings, tax benefits, and employer contributions can make a high deductible health plan very economical when compared to other insurance options.
How to Compare Health Insurance Plans
When it comes to comparing health insurance plans, there’s more to it than just the monthly premium, after all. It’s important to evaluate different policies carefully in light of your situation. Consider the following:
- the overall state of your health
- how often you visit the doctor
- whether you need expensive medication
- the annual dollar limit on coverage
- whether you would qualify for healthy lifestyle discounts
Make a list of what you need in a health insurance policy and then compare costs based on the following:
- what health services are covered
- copay amounts for doctor visits
- copay amounts for prescriptions
- hospitalization costs
- emergency costs
- whether your preferred doctor is in the network
Remember that the purpose of having health insurance isn’t to cover every expense associated with a head cold—it’s to reduce the cost of routine preventive services and to protect your finances against a devastating, expensive major medical condition.
Before opting for a high deductible health plan, be sure you can afford the deductible. If you fund a HSA on a consistent basis or have other emergency savings to tap, you probably can handle a higher deductible. If not, having higher monthly premiums could help you avoid a big, unanticipated medical expense.
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More Resources:
IRS Publication 502, Medical and Dental Expensesopens PDF file
IRS Publication 969, Health Savings Accounts and Other Tax Favored Health Plansopens PDF file
Preventive care benefits that can be provided by a high deductible health plan
National Association of Insurance Commissioners
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
