Insurance is tricky business, and generally speaking, shopping for insurance is a painful, albeit necessary task. What follows is not meant to be a comprehensive overview of Health Savings Accounts, but I hope to provide food for thought when you’re deciding whether an HSA is the right choice for you. Hopefully this blog post also generates some new ways to think about insurance as a financial strategy in general.
Philosophy of insurance
Gone are the days where robust health insurance plans required small deductibles and low co-pays for reasonable premiums. Today, health insurance can be incredibly expensive. Remember that insurance companies are like most businesses – their goal is to make money. As a result, they structure products in the hopes that they will collect more in premiums than they pay out in terms of benefits.
In America, most everyone has experienced the woes of expensive health care and/or expensive health insurance. But I’d encourage you to re-think how you use insurance. Insurance (of any type) should be in place to cover the most catastrophic losses.
Structure your home owner policy, for example, to have higher deductibles: you want the insurance company to rebuild your home if it is demolished in a storm. But don’t ask the insurance company to replace the picture window broken by an errant rock.
The best approach to all insurance is to build a suitable emergency cushion and carry high deductibles. The paradigm shift is that you are insuring yourself through your savings cushion for the more minor losses that occur, and you are transferring the risk of large losses to the insurance company through your premiums.
The same approach is useful with health insurance. Buy a high-deductible plan for the big expenses caused by a major health event or injury and use a Health Savings Account to “insure yourself” for smaller expenses.
(A disclaimer here: You should examine all deductible and premium structures the insurance company has to offer, as everyone’s situation is different. My comments are meant as a philosophical guideline only and not as individual recommendations.
Should you choose an HSA?
The short answer is yes. But since not everyone is eligible to have one, let’s dig a bit deeper. Do you have a high deductible health insurance plan? If so, that’s the first criteria for HSA eligibility. The second main requirement is that you are ineligible for Medicare, so under age 65 is when HSAs make the most sense.
I am a fan of HSA accounts if you are eligible to have one. Here are three reasons I like Health Savings Accounts.
Tax savings. HSA contributions are tax deductible. Better yet, they are considered “above the line” deductions, meaning even if you do not itemize your deductions, this is a deduction you get to take. Your contributions grow tax-deferred in the account, and when you spend out of the account for “qualified expenses,” the money comes out of the HSA tax-free.
More control over health care spending. Most high deductible plans these days offer “well benefits.” The insurance company might completely cover an annual physical, for example, as well as other preventative services. If you are paying lower premiums because you chose a higher-deductible plan, you can redirect the premium savings into a Health Savings Account. As long as you spend the HSA money on qualified expenses (meeting the IRS guidelines), you can choose providers as you wish, versus having to choose one that is “in-network.”
Flexible strategies. Some folks decide that the tax benefits are best when the account has the time to grow unhindered. Instead of saving in the HSA for annual healthcare expenses, they contribute each year and leave the money untouched. Then they just pay out of pocket for all health expenses that come up.
In this way, the HSA performs like an additional Traditional IRA account. In retirement, the money can be used for medical expenses and be tax-free. And if there aren’t enough medical expenses to use up the account (which would be hard to believe!), the money can be withdrawn in retirement and taxed just like a Traditional IRA is taxed.
Insurance as part of your overall financial strategy
Just like investments and other areas of personal finance, insurance is not as straight-forward as one might think. Everyone’s situation is different, so it pays to make all your financial decisions in a more holistic way. Too often people think of financial topics in silos, wearing blinders and only examining insurance in the context of insurance, for example.
Another example is tax strategy. All too often, people make financial decisions based on “saving on taxes” without considering how the decision will impact their other financial goals. Don’t be those people!
Let your financial goals guide you in all financial decisions. If you feel ill-equipped to do it alone, seek the help of a Certified Financial PlannerÔ. An expert can give you the objectivity you need to make decisions to reach your goals. However, the goals still need to be yours. That’s your job!
What are your thoughts on Health Savings Accounts, or on insurance in general? Share your thoughts below. Or if you want some like-minded friends, join the free SimpleMoney Community on Facebook to share your thoughts there!
P.S. I wrote an entire series on all types of insurance. Here is the blog post most applicable to Health Savings Accounts, and there you will find links to the rest of the series: Insurance, Simplified: Your Bod (Part Four in a six-part series)
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