What is Health Insurance?
Health Insurance is a type of insurance that covers the cost of medical expenses. Depending on the type of coverage you have, your insurance can be structured many different ways. You can be lucky enough to have your employer cover the entire cost of health insurance or maybe you are self-employed and have to deal with getting a policy from the insurance marketplace. Either way, there are a lot of moving parts and terms you should know so you can make the best decisions for you and your family.
Terms to Know
The amount you have to pay the insurance company each month to have the insurance coverage. How much is your premium?
A percentage of the cost you are responsible for when receiving services. Usually applies after you have paid the deductible.
Out of Pocket Max
The most you have to pay out of pocket during the calendar year. Once you reach it your plan will pay 100% of covered services.
The amount you have to pay out of pocket before the insurance company begins to pay any benefit.
High Deductible Plan
A plan with a higher deductible and lower monthly premiums. Having a HDHP allows you to use a Health Savings Account
Typically must stay in network for services to be covered. In network providers agree to lower cost. All services flow through the primary care physician. Referrals are needed. Usually a lower premium with low or no deductibles.
A fixed amount you pay each time you receive services. This amount can vary depending on the service needed.
Health Savings Account
Used with a high deductible plan. Funded with pre-tax dollars and withdrawn tax-free when used for qualified medical expenses
These plans have more flexibility. You do not need primary care physician referrals and you can get out of network coverage. Typically have a higher premium and deductible than HMO's.
Health Savings Accounts (HSA)
Health savings accounts are becoming increasingly popular in the United States and for a good reason. They offer a tremendous opportunity to save for health expenses both now and in retirement with big-time tax benefits. Here is what you need to know:
You need to have a qualifying high deductible health plan in order to be eligible for an HSA account
You can open an HSA account at many financial institutions, but shop around for the lowest costs
In 2019 you can contribute up to $3,500 for an individual and $7,000 for a family.
You will receive a debit card or checks to access the account. You can also transfer funds to a linked bank account.
HSA's are the only account that gives you the tax trifecta. You get a tax deduction on contributions, the funds grow tax-free and then withdrawals for qualified medical expenses are withdrawn tax-free. Wowsers!
You don't need to use the money each year. The account balance rolls over year after year.
You are able to invest the funds in your HSA account in low-cost index funds for long-term growth.
Here is the ideal situation. You have a high deductible plan with a low monthly premium. You and your family do not need a lot of medical services outside of covered annual physicals and preventive visits. You max out your HSA with a $7,000 contribution for the year without the need to touch any of those funds. You invest the full amount in a low-cost index fund. You continue maxing out your contributions in the years that follow, adding them to your investment funds. You are fortunate enough to not have to use the funds when medical expenses arise because you have sufficient savings outside of your HSA account to pay the bills. You save an electronic copy of receipts for all out of pocket medical expenses so you can withdraw funds tax-free at a later date. The HSA continues to grow tax-free year after year without any withdrawals. Fast forward 30 years and you could have over half a million dollars in your HSA account. You would be able to use previous receipts for out of pocket costs to take tax-free withdrawals whenever you want. Now that is pretty cool.