When you pick a medical insurance plan through a state or federal marketplace—or sometimes through your employer—you can choose a plan with either a high deductible or a low (or zero) deductible. The deductible is the amount that you must pay toward your health care before your insurer starts to pay some or all of your medical bills, and the deductible usually varies from a few hundred dollars a year to several thousand.
Insurance plans are a balancing act between deductibles and premiums. The higher the deductible, the lower your monthly payment, or premium, will be. And the opposite is true, too: The more you are willing to pay each month on your premium, the lower your deductible.
Read on to learn more about the differences between the two and how to pick what’s best for you.
What Is a High-Deductible Health Plan?
A high-deductible health plan is defined by the U.S. government as one that has an annual deductible of at least $1,350 and annual out-of-pocket expenses no greater than $6,750. (Those expenses include deductibles and co-payments, but do not include monthly premiums.) For a family, a high-deductible health plan is one with an annual deductible of $2,700 or more and annual out-of-pocket costs no greater than $13,500.
Let’s look at a fictional insurance shopper: Jane lives in Southern California, is single and is self-employed. She visits the state’s health insurance marketplace, CoveredCalifornia.com, to shop for a plan.
Jane has many options to consider, but one that catches her eye is a plan that costs $262 per month, with a deductible of $6,000 a year and an annual out-of-pocket cap of $6,650. Doctor visits carry a co-pay of 40 percent of the bill at the time of her visit, once she has met her $6,650 out-of-pocket cap.
Now, let’s say Jane has two teenage children she also wants to insure. She could choose a plan with a premium of $589 per month, with the other costs doubling: a $12,000 family deductible with a cap of $13,300 per year.
An accident or an unexpected serious illness can happen at any time, so a high-deductible plan could offer Jane peace of mind that she won’t be forced to pay medical expenses that could run into the hundreds of thousands of dollars. On the flip side, this means she will need to pay out of her own pocket for many medical visits and procedures until her family deductible has been satisfied.
What Is a Low-Deductible Health Plan?
A low-deductible health plan is one with a deductible of less than $1,350 per year. Employers often will offer their employees health plan options that include no-, low- or high-deductible insurance. While employers typically subsidize the plan, their generosity only extends so far: If you choose a no- or low-deductible plan, your payroll deduction will be higher than that of your co-worker who chooses a high-deductible plan.
Let’s look at Jane and her options again: As a self-employed person, she will buy her insurance off the state marketplace, and she wants to make sure she isn’t tasked with any high deductibles or medical bills. Again, she has a number of options:
To insure herself with a no-deductible plan, she’ll pay a premium of $616 per month. However, she will pay just $15 for doctor visits with no additional out-of-pocket expenses. To add the children to a $0 deductible plan, her premium will rise to $1,212.
Consider Your Stage in Life
With information about premiums in hand, Jane has a decision to make: What’s best for her and her family: a less-expensive monthly premium that could leave her with big bills down the road, or a higher premium and no bills?
For all of us, the decision on a health plan depends on our stage in life. Are you young, single and in great health? Do you have a family with young kids and plan to have another baby? Are you approaching middle age? Or are you approaching retirement and need a plan before Medicare kicks in and supplements the payment of health care costs? Each stage has different medical needs.
Younger people without pre-existing medical conditions who see the doctor just once a year for an annual physical might be comfortable choosing a high-deductible plan. People with chronic conditions who take several medications and know their medical expenses will run in the thousands each year might find paying the higher premiums of a no- or low-deductible plan easier on the budget in the long run.
Supplement Your Savings with a Health Savings Account (HSA) or a Flexible Savings Account (FSA)
Should you choose a high-deductible health plan, consider opening a corresponding Health Savings Account (HSA) or a Flexible Spending Account (FSA), if they are offered by your employer. Both allow you to draw on pre-tax savings to pay medical costs, including your deductible.
And, with an HSA, if your out-of-pocket health care costs are manageable and you don’t need to dip into it, the money rolls over from year to year, and you can build up a substantial savings account over time. Once you reach age 65, you can tap into your HSA, tax-free, for your retirement (consult your tax advisor).
Choosing a health care plan is a balancing act between predicting your medical needs and knowing what your checkbook can afford—and only you can make that decision after reviewing the plans offered.
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