Choosing the right health insurance can keep you and your finances healthy.
Money Girl
242 MG How to Save Money Using High Deductible Health Insurance
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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. A high-deductible health plan 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 $5950, if it covers just one person. For family policies, the deductible can be twice that amount, from $2400 up to $11,900. 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 might have to skip important checkups if your budget is tight. There's another huge benefit of having a high-deductible health plan. In addition to paying lower premiums for a high-deductible health plan, having one qualifies you 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, or 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 an 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 an 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. On the MoneyGirl page at quickandertietips.com, I'll put a link to IRS Publication 502, Medical and Dental Expenses, where you can check out the long list of qualified medical costs you can pay for using an HSA. Just look for episode number 242, called How to Save Money with High Deductible Health Insurance. 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 even 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 your HSA. The only downside is that if you withdraw money from an 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. The low cost and health savings account tax advantages that come with a high deductible health plan sound great, but how do you know if you come out ahead by using one? You need a way 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 two 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. - Hey, it's Austin James. 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Let's say the traditional plan at Emily's job has a $1,000 deductible and the maximum she can have to pay out of pocket for the deductible premiums and other expenses total $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. 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 overall state of your health, how often you visit the doctor, whether you need expensive medication, the annual dollar limit on coverage and 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 and 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 preventative 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 an 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. When you visit smartmovestogrowrich.com, you can find out how to connect with me on Facebook and Twitter. You can submit your money question, find out how to work with me for one-on-one financial coaching and get free downloads. And if you're a dog lover like me, you wanna raise a happy dog who loves to play and cuddle, but still comes when called and doesn't chew up your favorite shoes. 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