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- I have a high-deductible health plan (or HDHP) that comes with a health savings account, and I use that account to save for retirement instead of paying medical bills.
- Because I'm healthy and rarely visit the doctor, I can pay out of pocket for my medical costs and keep the money in my HSA invested.
- I know the money is there if I ever need it for medical bills — contributed pre-tax and withdrawn tax-free — and I can keep it there until retirement and withdraw to pay for any life expenses.
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When it comes to choosing a health insurance plan, the options with the highest deductibles can seem like obvious bad choices. This might be especially true if you know someone or you yourself have dealt with overwhelming medical bills in the past.
Better to get an insurance plan that will kick in sooner with a lower deductible and leave you paying less, right?
That may seem like good-enough logic, and for some people, this will be the best option. But avoiding a high-deductible health plan, or HDHP, might backfire.
In fact, for my own situation, I feel a HDHP offers me more benefits than drawbacks, especially when it comes to something that you don't usually associate with health insurance: investing money for long-term growth.
The benefits of high-deductible health plans, and the risk you take by using them
High-deductible health plans are those with a deductible of at least $1,400 for individuals — but your total out-of-pocket costs can go as high as $6,900 per year. (That's based on 2020 guidelines, per the IRS; these usually change each year.)
That might sound scary, but these types of plans can be great for folks like me: I have no history of health problems, I have no chronic illnesses, and my normal, planned use of health insurance can be described as "bare minimum." I take no medications and do not currently have a need to see any specialists.
Therefore, my main costs are my monthly premiums, and with HDHPs, those premiums are usually much lower than those of other plans with lower deductibles or total out-of-pocket costs.
The "high deductible" part of my plan has been a nonissue thus far, but this could easily change in the event of an accident, injury, or something else entirely unexpected. Because I know I have a high deductible, I need to manage the risk of actually hitting it. Within my emergency fund, I have about $5,000 earmarked in case I ever need to pay the full out-of-pocket cost required by my HDHP.
And just because I'm currently a light user of my insurance doesn't mean that will always be true. Should I decide to have children, for example, I'll likely want to reevaluate my options and consider if a different plan style makes sense to cover increased baseline medical costs for both me and any future children.
The real reason I want to use a high-deductible plan: the HSA option
Lower monthly premiums are one big benefit of HDHPs if you don't use your insurance much. The other major advantage? Access to a health savings account, or HSA.
An HSA is a savings and investment vehicle designed to help manage medical expenses. You can only use this account if you have an HDHP. Money you contribute to an HSA is not subject to income taxes, and the money you invest within the account can grow tax-free as well.
I max out my HSA each year (the 2020 limit for individuals is $3,550 and will go to $3,600 in 2021), but I pay for any medical bills out of pocket so I can keep the HSA money invested and growing for the long-term.
My strategy is to treat my HSA like a retirement account for as long as I'm working and earning an income, and can pay for medical bills from the income I currently earn. There are a few reasons for this.
First and foremost, the longer I leave my money invested, the better my chances of earning a positive return and realizing the benefits of compounding returns.
The second reason is because if I can leave this money invested long enough, it can be a useful part of my retirement nest egg.
Withdrawals from an HSA, when spent on qualified medical expenses, are tax- and penalty-free any time, just like contributions and earnings. But once you hit 65, you can use your withdrawals for any purpose without penalty. This can provide an additional source of income in retirement, and is treated the same way as withdrawals from your IRA: taxed based on your ordinary income tax rate at the time.
An HDHP works for me, but that doesn't mean it's the best choice for all
My reasons for using an HDHP and investing into an HSA with the intention of keeping that money invested rather than using it on healthcare expenses may make sense for you, too. But then again, your life (and health) might look extremely different from my own.
One personal perspective can be helpful to you in terms of thinking about the possibilities, but my experience can't provide you with enough factual information and data to make your own final decision.
I highly recommend running an analysis that evaluates multiple factors and variables to determine the best health insurance plan choice for your situation. I also suggest doing this every single year during your open enrollment period, because both available plan options and your personal health or circumstance may change over time.
If you're not sure where to get started, you can do this yourself with online calculators like this option or this one. Additionally, insurance analysis is usually part of the comprehensive financial planning offered by fee-only financial planners.
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