Affordable Health Insurance
Higher Deductibles Can Make Health Coverage Much Cheaper
© John Wu
Aug 28, 2009
Cheap health insurance sounds like an oxymoron these days. However, a savvy consumer in good health can get affordable health insurance by purchasing a high deductible health insurance policy that is tied to a HSA. The monthly premium savings over using a traditional health insurance plan can be substantial.
Health Savings Account
An HSA works just like an IRA or 401(k) account. It is a savings account that allows earnings to be tax deferred. Unlike a typical tax deferred retirement account, funds used for medical expenses can be withdrawn tax free. If funds are withdrawn for non-medical expenses before age 65, the withdrawal is subject to income tax and a 10% penalty. If the withdrawal occurs after age 65 for non-medical expenses, the withdrawal is subject to just the income tax.
The funds in an HSA are invested in various investment vehicles chosen by the consumer, similar to investments in a 401(k) plan or IRA.
If an employer contributes funds a HSA, the funds belong to the owner of the HSA immediately. Participants are 100% vested in all HSA funds regardless of the source, which is not always true with employer contributions to 401(k) accounts.
High Deductible Health Plan
High deductible health plans (HDHP) have monthly premiums that can be up to 50% cheaper than a traditional health insurance policy with low deductibles. Due to the high deductible in HDHPs, which can range from $1,150 to $11,600 in 2009, consumers cover the costs of medical care within the deductible by withdrawing funds tax free from the HSA or by using funds outside the HSA. Those in excellent health who use medical care infrequently can use the HSA as a retirement account while maintaining affordable health insurance with HDHP.
Keep in mind that a HDHP can be purchased without funding a HSA at all. Although this adds extra risk to the consumer, those who are young and healthy can make this gamble pay off.
The disadvantage of using a HDHP with a HSA is that those who fall into poor health after getting the policy have to set aside substantial amounts in their HSA account annually, and use HSA funds to get through the large deductible. Also, the HDHP may encourage some consumers to delay or forego medical care in order to preserve the value of their HSA account. Finally, the HSA is subject to investment risk just like a typical retirement account. Losses that exceed the HSA
Despite the above disadvantages, consumers who are in excellent health such as the young stand to benefit with the low premiums from HDHPs. Those who believe health insurance coverage should only be for catastrophic expenses are well served by getting cheap health insurance through a HDHP.
Those who cannot get health insurance may want to other affordable healthcare options.
References:
Lankford, Kimberly. "Health Savings Account Answers." Kiplinger's Personal Finance. January 2009.
IRS Publication 969.
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