You have many choices when it comes to paying for health insurance coverage. Even if your employer pays for most, if not all of your monthly health insurance plan, the coverage that you select might still have significant tax consequences that determine the type of coverage that you decide meets both your budget and health insurance needs. Choosing a health insurance plan without any financial support from an employer represents an important personal finance decision that makes a considerable impact on how you spend your monthly income.
One popular strategy to decrease your monthly health insurance premiums is to choose a plan that charges a higher-than-average annual deductible. The higher the annual health insurance deductible, the lower the monthly premiums you pay for coverage. Opting for a higher annual deductible might mean you qualify to purchase a high-deductible health plan (HDHP). Buying an HDHP can substantially lower your monthly premiums and deliver healthy tax savings that make purchasing such a plan a common sense personal finance decision.
However, you might face a few drawbacks if you choose an HDHP, which leads to one important question. What is a high-deductible health plan and how does it work?
What is an HDHP?
As the name suggests, a high-deductible health plan represents a health insurance policy that requires paying a relatively high annual deductible to receive health insurance coverage. An annual deductible is the value of the out-of-pocket expenses that you must pay for health insurance coverage. The more you have to pay out-of-pocket for annual health insurance coverage means you pay less in monthly premiums. To become eligible for enjoying tax savings by purchasing an HDHP, your annual deductible in 2022 must be at least $1,400 for an individual and $2,800 for a family.
You should know that the annual deductible is not the only out-of-pocket health insurance expense, as you might be responsible for covering the costs associated with copay and/or coinsurance fees. A copay fee is a flat fee charged for receiving care from a healthcare provider, while coinsurance represents the percentage of medical costs that you pay out-of-pocket. Although an HDHP plan requires the payment of a higher deductible than what an HMO or PPO charges, a high-deductible health plan places a maximum value on what you have to pay on your own. In 2022, the maximum out-of-pocket deductible cost of an HDHP sat at $7,050 for an individual and $14,100 for a family.
Many types of HDHPs grant policyholders 100 percent healthcare coverage for preventive healthcare services, such as mammograms, vaccinations, colonoscopies, flu shots, and annual physical examinations.
What Are the Advantages of an HDHP?
High-deductible health plans have grown in popularity because of the relatively low monthly premiums paid by policyholders. With the same type of coverage, an HDHP charges a lower monthly premium than another type of health plan offered by your employer or purchased on your own. The attraction of a lower monthly premium and a higher annual deductible is especially relevant for younger policyholders that do not face any significant healthcare issues. For example, a policyholder younger than 30 years old and in excellent health benefits from choosing an HDHP due to the expectation of not having to dip too deep into the annual deductible.
Another reason why a high-deductible health plan appeals to policyholders is the possibility to qualify for making contributions to a health savings account. The IRS describes the rules for becoming eligible to contribute to a health savings account in publication 969. Contributing to a health savings account allows you to invest pre-tax income into an account that you can use to finance medical expenses that include prescription medications and the use of an assistive device such as a pair of crutches.
What Are the Disadvantages of an HDHP?
The most important disadvantage of selecting an HDHP concerns the financial obligation of paying much higher out-of-pocket expenses for healthcare services. Having to pay for out-of-pocket medical care services can dramatically reduce the amount of money that you have available to pay other types of expenses like car and housing payments. For example, let’s assume your receive a diagnosis of a disease that requires intensive medical intervention techniques to address. The expensive treatments that you need come out of the higher annual deductible charged under a high-deductible health plan.
Another drawback of choosing an HDHP is that because of the higher-than-average annual deductible, you might delay scheduling visits with your physician because you cannot afford to pay for out-of-pocket healthcare expenses.
The Bottom Line: Find the Right Plan With Insurance Broker Hub
As one of many personal finance decisions that you have to make each year, enrolling in a high-deductible health plan makes sense if you are young, healthy, and rarely require healthcare for an illness or injury. This means you should not have any existing medical conditions that require immediate care. If you can afford a higher deductible and want to qualify to enroll in a health savings account, then a high-deductible health plan might be the right choice.
On the other hand, if you are a parent of one or more young children and/or you plan to welcome a new member into your family, then choosing an HDHP might be a cost-prohibitive decision. You also should avoid an HDHP if you plan on receiving extensive medical care such as undergoing a surgical procedure within the next 12 months.
As an independent insurance broker with access to every health insurance provider operating in the healthcare industry, Insurance Broker Hub eliminates the often frustrating and always time-consuming old-school way of shopping for affordable health insurance. You do not pay broker fees or have to pay extra for health insurance premiums to use the service. The no-obligation service can help you find a health insurance plan that matches your budget, as well as your healthcare needs.
Visit Insurance Broker Hub today to receive a free health insurance quote.
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