Higher Deductible + HSA = Manageable Health Care Costs

A recent study published in the Annals of Family Medicine indicates that by the 2030,annual health care costs will exceed the average household income. Many already feel the pinch from health care costs. As health care costs rise, it becomes harder and harder to manage them.

One way you can manage your health care costs is to combine a higher deductible on your health insurance plan with a Health Savings Account. Your higher deductible means a lower price paid for health insurance, and the Health Savings Account allows you to save up for out of pocket expenses.

High Deductible = Lower Insurance Premiums

Your deductible is the amount that you are expected to pay before your health insurance company starts paying your expenses. If you have a $500 deductible, that means you have to pay out of your pocket each year until you meet that $500. Then the insurance company will start paying its portion.

In exchange for you paying more up front, the insurance company charges you a lower monthly premium. Depending on how many health care services you use each year, and what they cost, you can save more in the long run by paying more up front, and reducing your monthly premium. Switching from a lower deductible to a higher deductible can save you, depending on the change, between 20% and up to 50% on your monthly premium. That’s not too shabby — especially if your family has few health needs.

Health Savings Account: Bank the Savings

One of the strategies that can help make things a little more manageable for you is to open a Health Savings Account. You can get a tax deduction for your contributions, and the money grows tax-free as long as you use it for qualified health care expenses.

The Health Savings Account (HSA) allows you to save up for your out of pocket expenses. You can set money aside in the HSA for use later. The HSA can even come with a debit card that allows you to access the money for a co-pay, prescription, or other health care expense. When you put money in the HSA, it is your money, so you don’t have to worry about the use it or lose it situation that arises with insurance premiums and even Flexible Spending Accounts.

When you want to use the money for expenses not related to health care, the HSA operates like an IRA. You end up with penalties, and the money is taxed. If you are 59 1/2, though, you can avoid early withdrawal penalties on non-health expenses — although you still have to pay taxes. But, if you use the money for health expenses, you don’t have to worry about taxes or penalties, no matter when you withdraw the money.

It Won’t Work for Everyone

Realize, though, that this plan won’t work for everyone. It’s really more for families who have relatively low need for health services, and want to manage their health care costs. If you have a chronic condition, or make frequent health care visits each year, you could easily pay your deductible and the premiums, and wind up paying even more because of the out of pocket expenses. Carefully consider before taking this option.

Written by Tom

Tom Drake writes for Stupid Cents and Canadian Finance Blog. Whenever he's not working on his online endeavors, he's either doing his "real job" as a financial analyst or spending time with his wife and two boys.

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