A High Deductible Health Insurance Plan (HDHP) can save you thousands in healthcare premiums and give you access to the ultimate investment account.
But does it benefit you?
In this post, we’re going to explore who benefits from a HDHP and who doesn’t.
If you do benefit, you should absolutely take full advantage of its cost savings to take care of all your future healthcare expenses and achieve financial freedom faster.
Does A HDHP Make Sense For You?
The biggest benefits of a HDHP are cheaper premiums, access to an HSA, and free contributions to the HSA that some employers provide.
The biggest downside of a HDHP is the higher deductible and out-of-pocket maximum expense limits.
- In 2024, the minimum deductible for the plan to qualify as a HDHP is $1,600 for individual coverage and $3,200 for family coverage (this is the amount you have to pay by yourself before the insurance company starts subsidizing your costs)
- The out-of-pocket maximum limits are $8,050 for individual coverage and $16,100 for family coverage (this is the maximum amount of healthcare expenses you have to pay in a year, which includes the amount you paid to hit your deductible)
Essentially, you save money upfront on your health insurance costs and pay higher out-of-pocket deductibles if you need to see a doctor. This is similar to paying extra for insurance coverage when buying a new phone in case you crack your screen. For some people this is a great tradeoff, for others, this might be an unaffordable risk. We’ll get to the scenarios where it makes the most sense later.
But keep in mind a few things:
- Regardless of health insurance, all preventative care is free (annual checkups, vaccines, etc.) so if you only go to the doctor once a year for annual checkups, that’s completely free under a HDHP
- Tax savings by maxing out your HSA contributions can be up to $1,536 for an individual or $3,071 for a couple every year
- Some employers make free contributions to your HSA (usually $500 to $1,500, but even more in some cases)
- While the deductible and out-of-pocket-maximum are higher, it’s difficult to hit those limits as all doctor visits and procedures are billed at your insurance company’s negotiated rates (they don’t want you to hit your deductible and out-of-pocket maximum or else they’re on the hook for paying!)
A combination of cheaper premiums, employer contributions, and tax savings may make the HDHP more cost-effective for you compared to other insurance plans. Run the math and see what’s best for you.
- Pro Tip #1: If you can set up contributions through your employer payroll deduction, you can also avoid paying 7.65% FICA taxes (Social Security and Medicare), an additional $318 or $635 of savings every year!
- Pro Tip #2: Along with an HSA, also take advantage of a Limited Flexible Spending Account (LFSA), which is the cousin to the more commonly known FSA but for HDHPs, which can be used to pay for any out-of-pocket vision and dental expenses, tax-free
When To Take Advantage of A HDHP
Here are a few scenarios that come to mind for those who might benefit from a HDHP:
- You are young and don’t have any long-term health issues (usually folks in their 20’s and 30’s)
- You don’t have any children or a sick partner
- You earn enough income to max out your HSA every year and use other funds to pay for health care expenses
- You are willing to pay your deductible and in the worst case pay the out-of-pocket maximum for the year
- Your HDHP has affordable deductible and out-of-pocket maximum limits
When A HDHP Might Not Make Sense
Depending on your circumstances, it may not make sense to have a HDHP or it might make sense to switch off a HDHP for a few years to plan around certain health procedures:
- You have a large upcoming medical procedure (such as surgery or childbirth)
- You use expensive ongoing medication
- You have a chronic illness that requires you to visit doctors frequently
- You can’t fund an HSA and pay for medical expenses with money outside the account
- You do not make enough to cover the deductible for the year and can’t afford the out-of-pocket maximum
- You are the type to not visit a doctor to avoid paying your deductible, even if you can afford it, which may cause your medical issues to grow more serious
- You have hobbies that have high risks of injury (rock climbing, skiing/snowboarding, scuba diving, etc.)
Maximizing Your HDHP
The whole point of health insurance is to protect yourself against an unaffordable black swan risk: medical bankruptcy.
Deciding if a HDHP makes sense for you is really taking a look at your own lifestyle and determining if you can spend the minimum on health insurance to protect yourself against medical bankruptcy while taking on more risk of paying higher deductibles if you need medical services.
In reality, even for a HDHP it is very difficult to hit the out-of-pocket maximum and usually requires serious emergency medical conditions, which is rare.
- For example, let’s assume a HDHP for family coverage with a $3,200 deductible and $8,000 out-of-pocket maximum and typical 20% co-insurance after you hit your deductible (insurance company will cover 80% of costs and you cover the remaining 20%)
- This would require you to have over $27,200 of medical treatment at lower negotiated rates (remember the insurance company doesn’t want you to hit your deductible so it doesn’t have to pay for your treatments!)
- $3,200 deductible + ($8,000 maximum – $3,200 deductible) / 20% = $27,200 to hit your out-of-pocket maximum
For large medical procedures that are not emergencies, you can plan around them by switching off a HDHP for an insurance plan with a lower deductible and out-of-pocket maximum.
Likewise, you can always have a HDHP (when you’re young, healthy, have no family, etc.) and switch to another insurance plan with lower deductibles later when your life changes.
When I run the numbers, the combination of savings from insurance premiums while still having full bankruptcy protection, tax savings from HSA contributions, free preventative care, and extra employer HSA contributions to offset the higher deductible makes having a HDHP a winning choice.
Regardless of the type of health insurance that makes sense for you, you’ll always come out ahead wealthier in life if you do one thing… take care of your own health!
Supercharge your wealth by taking care of your health early and reap the benefits down the road in life. Good health will make you far richer but a HDHP and HSA can be allies to help along the way.
Take advantage if you can, and don’t miss out on building a million-dollar Personal Health Fund!