With more and more small companies opting not to provide health benefits, more individuals and their families are being forced to purchase affordable health insurance on their own. But this can be easier said than done.
One of the most common mistakes that can be made is to try and replicate the benefits under a former group plan. Typically, these plans are very expensive in the individual market, primarily because of lower deductibles and co-pays for everything from physician visits to prescription drugs.
A viable alternative for many people is to consider a health savings account plan instead of a traditional health insurance policy with low deductibles and co-pays. A health savings account plan consists of 2 elements: 1) a high deductible health insurance policy (or HDHP) and 2) a savings account that is similar to an IRA (because it offers tax advantages).
Here is a 5-point plan approach to help individuals make the switch to a health savings plan:
1. Instead of an expensive policy with a low deductible, carry a low cost plan with a high deductible. This alone can save thousands a year in premiums.
2. Take the money saved on premiums and deposit it into a special tax-sheltered HSA. These deposits are 100% tax-deductible "above the line," so you instantly lower your tax bill each time you merely deposit money into your savings account.
3. You can then withdraw money from the HSA on a tax-free basis to pay routine medical bills during the year. When you use tax-free money to pay medical bills, you are using discounted dollars to pay those bills, thereby lowering their actual cost to you.
4. Most larger expenses should be covered under your high deductible health plan (after the deductible has been satisfied, subject to policy terms, benefits, and limitations).
5. What you don't use from the health savings account each year is always yours! The unused funds remain in the account and continues to grow on a tax-deferred basis, just like an IRA. In fact, HSA plans are often referred to as "medical IRA" plans because they help supplement your retirement, just like an IRA.
By following this 5-point plan, you should see your health care account grow and grow over time. It's a much more attractive option for most people than paying high premiums for health care they rarely need.
This article was written by C. Dean Richard, a benefits broker who has specialized in health savings accounts for individuals and the self employed since 1999. His expertise with health savings account plans has earned him the nickname "the HSA king."
