Navigating the health insurance market can be challenging and even overwhelming. Let’s take a look at two different types of health plans.
Low Deductible vs. High Deductible Health Plans
What is the difference?
A High Deductible Health Plan (HDHP) has a higher deductible, just as the name implies, that an individual or family must pay out of pocket for medical expenses before your insurance provider will begin paying a larger portion of charges. In 2021, qualifying HDHPs must have a minimum deductible of $1,400 for self-only or $2,800 for a family, and maximum annual out-of-pocket expenses of $7,000 self-only and $14,000 family coverage, as set forth by the Internal Revenue Service.
With a low deductible plan, the amount you have to pay before insurance is far less. However, you will have higher monthly premiums with a low deductible plan. You are eligible to open and contribute to a Health Insurance Savings Account (HSA) when you have a HDHP and no other health coverage.
The Power of an HSA
HSAs provide a triple tax advantage, allowing one to make pre-tax contributions, accumulate tax-free growth and make tax-free withdrawals to pay qualified medical expenses. If your employer offers it as a benefit, they may make contributions that are not counted as taxable income. An HSA is also portable and not subject to a “use-or-lose” rule like a flexible spending account (FSA). You can contribute to an HSA until you enroll in Medicare, even when you are not working, and invest your contributions. An HSA may be a great vehicle for saving for retirement medical expenses because the withdrawals for qualified medical expenses are tax-free and you are not required to take distributions, unlike a traditional 401(k) or IRA. If you wait as long as possible to spend the HSA assets, you can maximize potential investment returns and have more money to work with. The 2021 HSA contribution limits (employer + employee) per the IRS are: self $3,600, family $7,200, catch-up (age 55 or older) $1,000. There is even the ability to rollover funds from an IRA, once per lifetime, into an HSA. If you and or your employer have already contributed to the HSA that year, your one-time rollover plus the contribution(s) cannot exceed the annual contribution limit.
Which Plan Is Right for You?
Depending on your personal circumstances, the higher deductible can be offset by premium savings and the ability to contribute to an HSA. If you are healthy and do not often get sick or injured, a high deductible plan may cost you less over the course of the year.
A low deductible plan might be right for you if you have a chronic illness, need to see a doctor frequently or anticipate possible hospitalizations in the coming year.
Some companies may offer both high deductible and low deductible health plans. Some families have even been known to change plans during open enrollment in years they are expecting children.
The decision should be based on you and your family’s needs and priorities. It is important to estimate your health expenses for the upcoming year and review the details of the specific plans available. Some additional considerations when reviewing plans are network size, out-of-pocket maximums, and covered expenses.