The Real Benefit of a High Deductible Health Plan

Autumn is the time of year when you can see the leaves change colors, pick pumpkins and drink some warm apple cider. It also means that open enrollment is upon us. This time of year can be a bit confusing and intimidating when you are tasked with choosing your benefits package for the upcoming year. Your money is hard-earned, so let’s make sure you choose the best plan to maximize your potential savings while covering your health care needs.

The High Deductible Health Plan

Enter the high deductible health plan (HDHP). If you are relatively healthy, and do not typically go to the doctor’s office for more than routine checkups, you should seriously consider the HDHP. These plans have larger deductibles, the self-insurance hurdle that you must satisfy before your health plan kicks in, but also offer a tax-free way to save to cover those costs. For 2018 the minimum deductible for a single health plan is $1,350 with a maximum deductible of $6,550 and for a family plan the minimum is $2,700 with the maximum being $13,300. Typically, the higher the deductible the lower the monthly premium will be. 

The Benefits of a Health Savings Account

The real benefit of being in a HDHP is the access you are given to a health savings account (HSA). The health savings account is where you elect to save some pre-tax dollars to cover any future medical expenses before you meet your deductible. This account also has an investment option, so when you have your maximum out-of-pocket dollar amount saved in cash you can start to invest these extra dollars. Now, these extra dollars are for health care expenses only, but they can be banked throughout your lifetime so when retirement rolls around you will have a very nice nest egg for your medical expenses. The most powerful and impactful use for this savings will be for long-term care. Health care costs for seniors are expected to grow at approximately 5.8% over the next 10 years, and these future costs are quickly becoming retirees' most pressing concern regarding their retirement. (For related reading, see: Rules for Having a Health Savings Account (HSA).)

Not only can you bank these savings and invest them for future medical expenses, but once you turn age 65 you can pull your HSA funds out for everyday livings expenses and only have to pay income tax. The 20% penalty falls off once the account owner turns age 65. This means the HSA you have been putting money into for the last 20+ years has effectively become another retirement funding vehicle if health care costs are not a concern. 

The HDHP and HSA can be utilized as a very powerful savings tool to help with your retirement goals. But don’t forget that this is just a small piece that needs to fit in well with your current and future financial road map. (For related reading, see: How to Use Your HSA for Retirement.)