What Is a High-Deductible Health Plan?

What Is a High-Deductible Health Plan?

A high-deductible health plan is a form of health insurance that can help you manage health care costs. As you evaluate your financial options while you plan for retirement, it's worth looking into whether this type of coverage makes sense for you.

What Is a High-Deductible Health Plan?

High-deductible health plans come with a high deductible — the amount you pay for health care before your insurance company covers it. Your provider might cover the costs of preventative care, but you'll typically pay for other services out of pocket until you hit your deductible. After that, your insurer usually shares the costs of care with you until you reach a maximum annual limit, at which point your insurer would pay 100% of covered expenses.

The IRS sets specific rules defining high-deductible plans. For 2021, it defines a high-deductible plan as one with a deductible of $1,400 or more for individual coverage, or $2,800 for a family plan. The maximum annual out-of-pocket amount is $7,000 for individuals, or $14,000 for family coverage.

These numbers aren't set in stone. Insurers can set their deductibles higher than the minimum set by the IRS and their out-of-pocket limits lower than the maximum.

Other plans might have substantially lower deductibles, but they come with a trade-off: A lower yearly deductible often means you pay higher monthly premiums.

Many insurers offer high-deductible health plans. If you're still working, your employer might offer a high-deductible plan as part of your benefits package. You can also buy individual and health care exchange policies with high deductibles.

Does a High-Deductible Health Plan Make Sense for You?

If you (and any family members your insurance covers) are fortunate enough to be in good health, a high-deductible plan could make sense. You'd pay a lower premium with a high-deductible plan, and if you didn't need much care throughout the year, you could save money.

But if you have significant health care needs or you're beset by an unexpected health issue, a low-deductible plan might be the better plan for you. You'd pay higher monthly premiums, but you might end up paying less over the entire year.

What's best for you depends on the plan and the type of care you need. When you choose a health insurance plan, evaluate each plan's features and estimate how much you might spend during the year on health care.

What About a Health Savings Account?

When you have a high-deductible plan, you might be eligible to contribute to a health savings account (HSA). Because you pay lower premiums with a high-deductible plan, you might have extra funds to contribute to an HSA. And HSAs could provide triple tax benefits that make it easier to afford care:

  • Your contributions might be tax-deductible.
  • Any growth in the account is tax-deferred.
  • Your withdrawals are tax-free if you spend the money on qualified medical expenses.

When you can pay for health care with pretax dollars, the total cost might be easier on your budget. Plus, an HSA gives you a way to set aside money for rainy day health care expenses — something you might need given your plan's higher deductible.

HSAs aren't use-it-or-lose-it accounts, either. If you don't spend the money each year, you can keep it in your account as long as you need it for health-related expenses.

The Bottom Line

A high-deductible health plan is a tool that might help you minimize health care expenses. If you (and your family) need relatively little health care in most years, this type of health insurance might be appropriate for you. And when paired with an HSA, you can potentially pay for care with pre-tax dollars and save for future expenses. To decide what's best, evaluate your health care needs, compare costs among all of your options, and choose the policy that makes the most sense.

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