When it’s time to sign up for a health insurance plan, you and your employees have a lot of choices. One of them may be whether to choose a traditional health plan or a high-deductible health plan (HDHP).
Both types of health insurance plans will have a deductible and premium. Knowing what these terms mean can help you decide which health plan is best for you.
Premium: Like with other types of insurance policies, a premium is your cost for coverage. With health insurance, you'll pay a monthly cost that's typically taken out of each paycheck.
Deductible: This is the amount of money you pay out of pocket before your health insurance company starts covering costs.
HDHPs have higher deductibles than traditional insurance plans, but they also have a lower premium. For 2020, these health insurance plans have a minimum deductible of $1,400 for individual plans and $2,800 for family plans.1
How Do High-Deductible Health Plans Work?
A high-deductible health plan works like other health insurance plans by helping pay for your medical care. HDHPs provide 100% coverage for preventative care from in-network providers, including:
- Annual physicals
- Vaccines for children and adults
- Screenings for certain types of cancer
- Baby and child well-being exams
- Counseling sessions
- Wellness visits for women
For other medical services, you’ll first have to meet your deductible. Then, your health insurer will start covering medical services, and you’ll only pay coinsurance. Coinsurance is typically a percentage of the total cost, and your health plan will tell you how much it is. For example, if it costs $200 for an office visit, your coinsurance is 20%, and you’ve already met your deductible, you’re only responsible for $40. Your health insurer covers the rest of the bill.
Once you pay enough to meet your out-of-pocket limit, your insurer will cover your entire healthcare cost. Like with deductible amounts, out-of-pocket limits are set by the IRS. For 2020, out-of-pocket limits are $8,200 for individual coverage and $16,400 for a family plan.2 Your health plan will tell you how much your specific out-of-pocket limit is.
High-Deductible Health Plan Premiums
The general rule is: the higher your deductible, the lower your health insurance premium. So, if you decide you’d rather have a health plan with a lower deductible, you’ll probably pay a higher premium. But your specific HDHP cost depends on different factors, such as your:
- Tobacco use
High-Deductible Health Plan Tax Benefits
To help offset the costs of meeting a higher deductible, many people with HDHPs also open a health savings account (HSA), a tax-advantaged savings account. With an HSA:
- You don’t pay federal taxes on the money you put into it
- Your total annual contribution is tax deductible
- Your money can earn interest, which is also tax-free
- Any money you don’t spend rolls over into the next year
There are contribution limits for HSAs. For 2020, you can contribute up to $3,500 if you have individual coverage or $7,100 if you have family coverage.3
You can use the money you contribute to an HSA to pay for qualified medical expenses, such as:
- Copays or coinsurance
- Certain over-the-counter medications
- Glasses or contacts
If you use your HSA to pay for non-medical expenses, you’ll have to pay income taxes and a penalty on the amount you spend. Visit the IRS' website to find a full list of eligible expenses.
Disadvantages of High-Deductible Health Plans
Out-of-pocket costs are the big disadvantage when you have a high-deductible health plan. Before your insurer starts paying for services, you’ll have to meet your deductible by paying for health expenses yourself.
This means you can have high out-of-pocket costs if you have a chronic illness or take medications regularly. Over time, these expenses add up.
What Type of Health Plan Do I Need?
Choosing the right health insurance plan depends on your needs. If you have a lot of medical expenses or need to go to the doctor often, a traditional health plan may be a good option. Although your monthly premium would be higher, you’d have a lower deductible, which means lower out-of-pocket costs.
On the other hand, if you don’t have many medical costs, a high-deductible health plan can help you save money on monthly premiums. But you’ll need to make sure you can afford to pay your deductible if a health emergency comes up.
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