In this video, wealth advisor Jamison Smith from EWA delves into the distinctions between high and low deductible health insurance plans. He assists viewers in discerning which option aligns better with their family’s needs.
High deductible health plans require individuals to pay more upfront expenses before insurance coverage initiates. While these plans typically feature lower monthly premiums, they entail higher maximum out-of-pocket costs. A notable advantage of high deductible plans is the opportunity to establish and contribute to a Health Savings Account (HSA). To qualify for an HSA, the deductible must meet a minimum threshold, offering triple tax benefits: tax deductions upon contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Conversely, low deductible plans have lower deductibles, ensuring quicker insurance coverage commencement. Nonetheless, they come with higher monthly premiums, making them more suitable for individuals with chronic illnesses or frequent doctor visits.
Jamison illustrates the cost differences between both plan types with a comprehensive example, factoring in HSA contributions’ tax advantages. In many instances, the high deductible plan with HSA contributions results in a lower overall cost compared to low deductible plans.
Ultimately, the choice between high and low deductible plans hinges on individual health, age, and financial circumstances. Young, healthy individuals with infrequent doctor visits may discover that high deductible plans offer more cost-efficiency. Nonetheless, Jamison underscores the importance of consulting experts or an employer’s benefits specialist to make a well-informed decision tailored to one’s specific situation.
I am Jamison Smith, a wealth advisor at EWA. In this video, I’m going to break down the differences between a high and low deductible health insurance plan and which one is right for you and your family.
So this is a common question that clients ask us generally in the fall. Open enrollment for most companies is usually around November. And clients always ask us, should I be on a high deductible plan or a low deductible plan?
So let’s take a look at the differences. High deductible health insurance Plan just as the name states the deductible is higher, meaning you have to pay more money out of pocket before the insurance actually kicks in.
So, big benefit of a high deductible plan is that you have access to fund a health savings account. And to qualify for a health savings account if you’re married, filing jointly, the deductible has to be $2,700 a year.
Think of a high deductible plan somewhere in that range of a deductible. Lower monthly premium. So the monthly payment is lower than a low deductible plan, but the out of pocket max is generally higher, which means the maximum that you would ever have to pay out of pocket is higher than the low deductible plan.
Low deductible plans are, as the name states, deductible is lower, so the insurance will kick in faster than the high deductible plan. Monthly premiums are generally higher. The downside of this is you’re overpaying if you do not need a lot of care, and this is best if you have any illness or disease or you’d have to see a doctor regularly.
Main benefit of the high deductible plan, as previously mentioned, is the ability to fund an HSA health savings account. So HSA has to be a high deductible health insurance plan. Big benefit is taxes.
It’s triple tax beneficial. So what that means is you get a tax deduction when it goes in. It can be invested in all the growth, it’s tax free. And if it’s used for health insurance expenses, anytime now, until retirement or in retirement, it comes out tax free.
The max you can put in as of 2021 if you’re married, filing jointly is $7,200 a year. And if you’re over the age of 50, you can put an additional $1,000 a year into it. It is not use it or lose it. So a flexible spending account is use it or lose it.
That means that if you put money into it this year and you don’t use it by the end of the year, you don’t get it back next year, you lose that money. Health HSA is not the same as that. It rolls over each year.
So if you don’t use it, you can use it again the next year and it continues to roll over. General rule of thumb is if you have access to this fund, it leave the money invested to take advantage of the tax free growth and then pay cash to pay for the deductible or any health expenses.
So let’s look at an example of which one’s actually cheaper. Throughout a high deductible health insurance plan, let’s assume your monthly premiums are $120 a month. So that is $1,440 per year. The deductible that you’d have to hit is $2,700 a year.
So total cost of the high deductible plan would be 41 40 per year. But if we factor in if you’re in a 37% tax bracket and you put $7,200 into the HSA, that is a tax savings of $2,664. So the net cost of this is $1,704 per year.
From the low deductible plan, you’re paying more monthly. So $200 a month. We can assume that’s $2,400 per year deductible is a lot lower $1,500. We’ll say total cost of this worst case scenario, that year is $3,900.
So if you aren’t able to fund the HSA, then the low deductible plan could be more beneficial. But when we factor in the tax savings of the HSA, then generally it makes a lot more sense to fund the high deductible plan.
So which one’s right for you? Depends on your family situation. If you’re young and healthy and you don’t plan to go to the doctor very often, then the high deductible plan generally makes more sense.
If you plan on going to the doctor more, it may make sense to be on the low deductible plan, but most of the time, as the math shows here, the high deductible plan will make the most sense, given your situation.
If you have specific questions about your employer benefits or want us to review them, feel free to reach out. We’re happy to help.