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Should I Choose a High- or Low-Deductible Health Insurance Plan?

Oct 12, 2020 4 min read Rebecca Lake

Key takeaways

  • Low deductibles are best when an illness or injury requires extensive medical care.
  • High-deductible plans offer more manageable premiums and access to HSAs.
  • HSAs offer a trio of tax benefits and can be a source of retirement income.


If you're enrolling in your employer's health insurance plan for the first time or updating your existing coverage, it pays to be prepared. One question you might have is whether it makes more sense to go with a high-deductible or low-deductible plan.

Like most benefits-related questions, there is no one-size-fits-all answer to that question; it just depends on your individual needs.
 

 

High-deductible health plan basics

As the name suggests, a high-deductible health plan (HDHP) carries a higher deductible, which must be met before your plan benefits kick in for anything beyond in-network preventive care services. A high-deductible plan is any plan that has a deductible of $1,400 or more Opens in new window for individual coverage and $2,700 or more for family coverage.

High-deductible plans typically have higher out-of-pocket maximum limits, but once you reach that limit each year (including what you pay for your deductible, copayments and coinsurance), the insurance pays 100% of the allowable amount for the rest of the calendar year. The annual out-of-pocket total can't exceed $6,900 for individual plans ($7,000 in 2021) and $13,800 for family plans ($14,000 next year), excluding out-of-network services.

While you'll pay more for your deductible with one of these plans, you do get the benefit of a lower premium. That's a plus if you stay healthy and never need to meet your deductible or the maximum out-of-pocket limit.

The other big advantage of high-deductible insurance is that qualified plans offer a health savings account (HSA) to help manage health care costs.

 

What's a health savings account?

A health savings account (HSA) is a tax-advantaged account you can use to save for qualified medical expenses, including:

  • Weight-loss programs
  • Eye exams and eyeglasses
  • Dental treatments
  • Hearing aids
  • Nursing homes and long-term care

HSAs come with some great tax incentives to encourage you to save. Contributions are tax deductible, and they grow tax free. Withdrawals are also tax free when they're used for eligible medical expenses.

Unlike flexible spending accounts (FSAs), HSAs aren't “use it or lose it.” You can leave the money in your account until you need it for eligible medical expenses. Beginning at age 65, you can withdraw money from an HSA for any reason with no tax penalty. You'll just pay ordinary income tax on the withdrawal, making it a potential source of backup income in retirement if you stay in good health.

There's one thing you need to know about HSAs, however. Not every high-deductible plan offers themso if you're in doubt, check with your plan administrator to see if it's an option.

 

Low-deductible health plan basics

Low-deductible health insurance plans carry a lower deductible, meaning that when you get sick, you pay less money upfront before your plan starts paying. The trade-off is that you'll pay more for your monthly premium when you have low-deductible coverage.

An obvious downside to these plans is that if you don't end up needing more extensive medical care, you'll have paid a higher monthly premium for nothing. The silver lining, however, is that low-deductible plans make managing and predicting health care expenses easier if you develop a serious illness, are injured or need surgery. There's no large out-of-pocket expense to worry about since the deductible is lower.

Even so, sacrificing a lower monthly premium to get a lower deductible also means giving up something else: a health savings account.

 

High or low? Which is right for me?

The simplest way to decide whether a high or low deductible plan makes more sense is to consider your health situation.

If you're young and healthy, you may be less likely to need anything more than preventive care, in which case a high-deductible plan could be the better fit. On the other hand, a lower deductible may be more appealing if you're older, have a chronic health condition, participate in high-risk sports or activities, are pregnant or plan to have a child at some point, or you require pricey prescriptions for a health issue.

It also helps to assess your savings and budget. Consider how easily you'd be able to meet a higher deductible if necessary. And if you have access to an HSA with a high-deductible plan, ask yourself how much you'd be able to contribute each year. (Note: Similar to other tax-advantaged accounts, HSAs have annual contribution limits: for 2021, $3,600 for individuals with self-only coverage [up from $3,550 in 2020] and $7,200 for those with family coverage [up from $6,900 this year].)

With a low-deductible plan, think about how much you can afford to pay for the monthly premium. Weigh that against the value of being able to have health care services covered when you need them without having to hand over a significant amount for the deductible.

 

What you can do next

Review your health history to determine whether you'll need more than just preventive care for the upcoming year. Most importantly, reach out to your employer or health plan administrator to get answers to any questions you might have about the plans being offered.

Footnotes

 

Rebecca Lake has been covering finance, investing, and small business for nearly a decade. Her work has appeared online at U.S. News & World Report, MSN Money, Business Insider, and Investopedia.

 

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