October 29, 2020
If you are in the midst of your employer’s open enrollment period to sign up for next year’s benefits, or your household is dealing with a layoff, I want to make sure you choose the right health insurance plan.
A high deductible health plan (HDHP) is an increasingly popular option offered through work. And for those of you who have been laid off and need to purchase your health insurance through your state’s health exchange, a HDHP will be among your choices. (To purchase a policy, start at the healthcare.gov website to be directed to the right online site based on where you live.)
A HDHP can seem like a great choice because the premium cost is typically lower than other types of coverage. But as the name makes clear, there is a high deductible you must pay before coverage kicks in. Next year, the minimum deductible for an HDHP plan is $1,400 for single coverage and $2,800 for maximum coverage.
On top of that, the annual maximum out-of-pocket expenses (copays and coinsurance) can be quite high. The maximum limit in 2021 is $7,000 for individuals and $14,000 for family coverage. That doesn’t mean your employer will set that high of a limit, but you better check out what you’re on the hook for if you actually need medical care.
Okay, so you know I am a big believer in “hope for the best and plan for the worst.” Well, let’s apply that here: how will you cover your deductible if you or anyone on your plan needs care? What would happen if you (or someone on your plan) needs extensive coverage next year and your out-of-pocket expenses will reach the limit? Can you cover it with savings, or will you end up putting it on credit cards you can’t pay off?
There is some good news. Some employers who offer an HDHP pair that insurance with a Health Savings Account (HSA). Money in an HSA can be used tax free at any time to pay qualified medical costs. Some employers make a contribution to a worker’s HSA plan. If your employer chips in money to help you meet your out-of-pocket expenses that can be a big help, but compare that help to what your total out of pocket expenses might be. Most HSAs are funded with worker contributions. (Or the plan doesn’t even offer an HSA).
If you are interested in the HDHP offered through work, and it offers an HSA, ask yourself a few questions:
If you enroll in an HDHP and then can’t afford to cover your deductibles and copays you are setting yourself up for trouble. Surveys show that people with HDHPs are more prone to have medical debt. Why? Because when they actually went to use their insurance, they didn’t have money saved in an HSA or their own emergency fund to cover their expenses.
Or even worse, is that people with HDHPs tend to delay seeking medical care, because they know they will go into debt to cover the deductible.
I know some of you with workplace health insurance have no choice: a HDHP is all you are offered. In that case, I want you to follow the same advice for people who are considering an HDHP offered through their state health insurance exchange. The main message I have for you is to make it a top priority to set aside money so you know you can pay for the deductible and any out of pocket costs.
If your HDHP allows you to contribute to an HSA, that is a fantastic option. Money you contribute reduces your taxable income. The money grows tax-free while it is your account. You can leave the money growing year to year (and when you leave a job, the HSA account is yours to take with you.) When you withdraw money from an HSA to pay a qualified medical expense there will be no tax on the withdrawal.
If an HSA is not in the picture, your job is to double-down on building your own emergency savings fund. The bottom line is that if you choose an HDHP your financial health is riding on how you will be able to pay for what can be high out-of-pocket expenses.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.