When is a high-deductible health insurance plan a good idea?
High-deductible health plans (HDHPs) have traditionally been thought of as an option primarily for those who are in very good health. As their name suggests, HDHPs have high deductibles, but they also have lower premiums than most other plans. This is what makes them an attractive option for healthy people – the high deductible is only a problem if you have significant medical expenses. If you don’t have such expenses, then you simply get to enjoy the low premium while still having coverage in case something catastrophic happens.
However, high-deductible health plans can also be useful for people who have very high medical expenses. Maximum out-of-pocket costs on HDHPs are almost always lower than those on other types of health plans. If you’re very sick and need a large amount of medical care, there is a good chance that you will reach that upper out-of-pocket limit regardless of the size of the deductible, and having that limit be lower can mean less money paid out-of-pocket overall.
The other great thing about HDHPs is that they allow you to make contributions to a health savings account (HSA). Health savings accounts allow you to use pre-tax dollars to pay for medical care instead of the after-tax dollars you would be using if you decided to pay for everything straight out-of-pocket. Without an HSA, you can only deduct medical expenses that exceed 10% of your income and you must itemize your deductions. But with a health savings account, you can deduct as much as you have put into it up to a certain limit and there is no need to itemize. The money in the account will also roll over from one year to the next and can be used to pay your deductible, out-of-pocket expenses, and any qualified medical expenses that are not covered under your plan. Having an HSA is a great way to make sure that you will be able to cover your plan’s high deductible. Even if you do not decide to keep your high-deductible plan long-term, the money in your health savings account will still be available for you to withdraw tax-free for future medical expenses.
Overall, high-deductible health plans can be great choices for those who are healthy and want a plan with low premiums as well as those anticipating high medical costs and looking to take advantage of HDHPs’ lower out-of-pocket maximums. If you fall into either category and have some money to put into a health savings account, an HDHP is definitely worth looking into. However, if you anticipate needing a moderate amount of medical care in the coming year, the high deductible may offset the low premiums and out-of-pocket maximum, so you will likely want to look at other types of plans.
What is the difference between an FSA and an HSA?