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Taking Time to Explore Health Care Options: There’s Value in Not “Going Big”
Published Date : March 3, 2015
Big, expensive, “full-service” health care policies may seem like the first choice for affluent individuals who may feel that they can afford such a policy. After all, why not pay for the most coverage available?
With careful exploration, comparative analysis, and a fresh view of all overall out-of-pocket medical expenses, the choice worth considering might well be a high deductible plan offering significantly lower annual premium costs and interesting tax advantages in the form of tax-free savings in an accompanying health savings account (HSA).
As with homeowner insurance coverage where you insure against a large loss and not the cost of losing a picture frame, affluent families need not worry about small expenses such as doctor’s visits. Instead, they need protection against catastrophic health risks. The no-deductible high premium policies offer attractive coverage for expenses such as a visit to the primary care doctor or a trip to the rehabilitation physical therapist. Though the savings on such expenses may add up, there may be a better solution.
Instead of a traditional premium policy, let’s consider high deductible plans that offer dramatically lower annual premium expenses and an opportunity to do some effective tax-favored saving with the differential. In some cases, you will find that the all-in cost of the high deductible policy (premium plus out-of-pocket costs) is very close to just the annual premium on the no-deductible policy. With the no-deductible policy you’d still have the big out of pocket limit to potentially pay each year, thus significantly exceeding the all-in annual cost of the high deductible plan.
Additionally, high deductible plans allow an individual to contribute to an HSA account, providing the policy holder more control over how he/she saves for and manages health care expenses. An HSA account is like an investment account with the specific purpose of funding medical expenses. Funds within an HSA can be used to cover the annual deductible and or specific charges.
According to IRS guidelines for 2015, contributions to an HSA are limited to $3,350 for an individual and $6,650 for a family. Like retirement accounts, older account holders have the opportunity to contribute more than the standard limit. HSA account holders ages 55 and older get to save an extra $1,000, which means $4,350 for an individual and $7,650 for a family.
A significant benefit of the HSA is that after-tax dollars are 100% tax deductible from gross income and pre-tax dollars are tax-exempt, making this a viable part of your tax and medical plan strategy. Within an HSA account, contributions can be invested, earning tax-free interest.
Withdrawals are not taxable if used to pay approved expenses. However, funds withdrawn for non-medical purposes prior to the account holder reaching age 65 are penalized 20% and also taxed at regular income tax rates. After 65, withdrawals for non-medical needs are not penalized and can be used like an IRA withdrawal for any personal needs. They are taxed as regular income since contributions were made on a pre-tax basis. An HSA is the only retirement-like account that are 100% tax-free if used for medical expenses – they aren’t taxed on the way in or out.
If you know you’re likely to meet your out-of-pocket limit, with a high deductible plan you can do it upfront with 100% coverage beyond the out-of-pocket expense. Remember Michael Mantell’s quote “Don’t sweat the small stuff”? Protecting against a major health event with as little all-in out-of-pocket expense is a valuable strategy. It may not be a solution for everyone but it may make sense for you and your family.
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