Anyone who has ever paid for an insurance policy, whether for car, home, or health, has probably tried to find ways to reduce costs. Bundling policies is often a good option, and discounts for safe driving, anti-theft devices in cars, and a monitored alarm system in the home can cut costs on certain plans, as well.
What about health insurance? How can you lower costs? With the passage of the Affordable Care Act (ACA), or Obamacare, millions of previously uninsured Americans suddenly became eligible not only for affordable coverage, but for guaranteed preventive services under the standards for mandatory minimums.
However, the law made coverage for every U.S. citizen mandatory, as well, so that Americans who choose to go uninsured must pay an annual penalty for failure to comply with the law. Although Obamacare made assistance available to low-income individuals and families, plenty of people would still like to save as much money as possible on the cost of health insurance coverage.
One of the easiest ways to reduce monthly premium costs is with a deductible. Insurance policies come with a variety of options for coverage, and one option includes several different choices for annual deductible costs, ranging from about $500 to about $5,000 in most cases, although it depends on the provider and the plan.
By increasing the annual deductible, users could decrease their premiums, but there are several other factors to consider. How exactly do deductibles work? What are high deductible health plans, or HDHPs? How do you stand to benefit from choosing this type of policy? Here’s what you need to know before you make a decision.
How Deductibles Work
A deductible is the amount of money you are expected to pay within a given year toward your own healthcare expenses. Certain types of care will be covered regardless of the amount of your deductible or how much you’ve paid. This generally includes preventive care and other services specified as mandatory under the ACA’s minimum coverage rules.
For non-covered services, you will be expected to pay up to your deductible amount annually before additional insurance coverage kicks in and begins to pay your medical costs. If, for example, you have a deductible of $1,000 and you require a procedure that costs $2,000, you will pay the first $1,000 and your insurance should cover the rest. At least, that is the basic concept – coverage will obviously vary by policy.
The amount of deductible you choose for your policy will impact the amount you are charged for premiums. Selecting a plan with a higher deductible will lower your monthly premiums. However, should you incur unexpected medical costs, you will have to pay up to your deductible amount out of pocket.
Choosing your deductible is a little bit like gambling. If you choose a high deductible and avoid medical expenses, you’ll save money by paying lower premiums. However, if you have medical costs, you could end up spending more for your deductible than you would have on higher premiums.
Before choosing, it’s best to consider your overall health and the health of family members. If you’re relatively healthy and you don’t anticipate any costly medical problems, the chance that you will have to pay your deductible in the course of a year is probably minimal and worth the risk.
What are HDHPs?
HDHP stands for high-deductible health plan, but what does it mean in practical terms? In order to fall into this category, the deductible must meet a certain threshold. The IRS has defined this threshold as $1,300 or more for an individual or $2,600 or more for a family, as of 2016.
Benefits of High Deductibles
Choosing a plan with a high deductible can be a frightening proposition. Sure, it’s nice to pay lower premiums, but what if you or a family member suffers an unanticipated accident or illness that incurs massive medical expenses? If you have a $5,000 deductible, you will have to pay up to that amount out of pocket before insurance will cover any expenses. Plus, if your expenses bleed into the next year, you’ll have to pay that $5,000 again.
On the other hand, paying a much higher premium for little or no deductible might never pay off if you are healthy as a horse and incur no medical expenses over the course of the year. The basic rule of thumb is to consider anticipated medical costs.
If you or a family member on your plan (spouse, child) is prone to accident, illness, or known medical expenses, it may be worth lowering your deductible and paying more for premiums to gain immediate coverage for medical costs under insurance. However, if you have no looming medical expenses, there’s no reason to pay higher premiums.
If you’re concerned about the potential for having to pay your deductible, simply put the money you’re saving on premiums into a savings account of some sort. When you need it, you’ll have at least some of the money for your deductible available. If you don’t end up needing it, you can let it sit for the following year, earning interest, or use it for something else.
Health Savings Accounts
If you have chosen a high deductible health plan and you find that you will have upcoming medical expenses, say for a planned procedure, you might want to start saving money to pay out-of-pocket medical costs.
While many businesses offer flexible spending accounts (FSA) that allow you to place pre-tax dollars into an account that will go directly toward medical costs, you might want to opt instead for a health savings account. The major benefit of this type of account over an FSA is that the funds can be rolled over from one year to the next, even if you change jobs or are no longer employed.
Not only will you not lose the money, but you will earn interest in the meantime. This type of account cannot be set up through your place of employment – you will have to arrange it with a financial institution such as your bank. If you have a high deductible health plan, this is the best way to save money while still socking away the funds to cover your deductible should the need ever arise.
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