How you can use my excessive deductible medical health insurance plan to save lots of for retirement
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- I have a High Deductible Health Insurance Plan (HDHP) that comes with a Health Savings Account and I use that account to save for retirement instead of paying medical bills.
- Since I’m healthy and rarely go to the doctor, I can pay for my medical expenses out of pocket and invest the money in my HSA.
- I know the money will be there if I ever need it for medical bills – paid before tax and withdrawn tax free – and I can keep and withdraw it there until I retire to pay any living expenses.
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When it comes to choosing health insurance, the options with the highest deductibles can seem like obviously bad choices. This can be especially the case if you know someone or have faced overwhelming medical bills in the past.
Better to get an insurance plan that kicks in earlier with a lower deductible and lets you pay less, right?
That may seem good enough, and for some people this is the best option. Avoiding a high-deductible health plan (HDHP), however, can backfire.
For my own situation, I feel that having an HDHP gives me more advantages than disadvantages, especially when it comes to something that you normally don’t associate with health insurance: investing money for long-term growth.
The Benefits of High Deductible Health Insurance and the Risk You Take by Using It
High Deductible Health plans are those with a deductible of at least $ 1,400 for an individual – but your total cost can be up to $ 6,900 per year. (This is based on the 2020 guidelines under the IRS; these usually change every year.)
It may sound scary, but these types of plans can be great for people like me: I have no history of health problems, I have no chronic illnesses, and my normal, planned health coverage can be described as an “absolute minimum.” I don’t take any medication and I don’t need specialists at the moment.
Therefore, my main expense is my monthly premiums, and with HDHPs these premiums are typically much lower than other plans with lower deductibles or total out-of-pocket expenses.
The “high deductible” part of my plan has never been an expense, but that could easily change in the event of an accident, injury, or something completely unexpected. Knowing that I have a high deductible, I need to control the risk of actually hitting it. My emergency fund has about $ 5,000 in reserve in case I ever have to pay the full cost of my HDHP.
And just because I’m currently a light user of my insurance doesn’t mean it will always be. For example, should I choose to have children, I might want to reassess my options and consider whether a different style of planning makes sense to cover the increased basic medical costs for myself and future children.
The real reason I want to use a high deductible plan: the HSA option
Lower monthly premiums are a huge benefit of HDHPs if you don’t use your insurance frequently. The other big advantage? Access to a health savings account or HSA.
An HSA is a savings and investment vehicle that can be used to manage medical expenses. You can only use this account if you have an HDHP. Money you contribute to an HSA is not subject to income tax, and the money you put in the account can also grow tax-free.
I maximize my HSA each year to the max (the 2020 limit for individuals is $ 3,550 and will be $ 3,600 in 2021), but I pay all medical bills out of pocket so I can hold and grow the HSA money invested over the long term.
My strategy is to treat my HSA like a retirement account while I work and earn an income, and pay medical bills out of the income I currently earn. There are several reasons for this.
First and foremost, the longer I leave my invested money, the better my chances of generating a positive return and realizing the advantages of compounding returns.
The second reason is that if I can keep this money invested long enough, it can be a useful part of my retirement nest egg.
Withdrawals from an HSA that are spent on qualified medical expenses, as well as contributions and income, are tax and penalty free at all times. Once you reach 65 you can use your withdrawals for any purpose with no penalty. This can provide an additional source of income in retirement and is treated the same as withdrawing from your IRA: Taxed based on your normal income tax rate at the time.
An HDHP works for me, but that doesn’t mean it’s the best choice for everyone
My reasons for using an HDHP and investing in an HSA with the intent to keep the money invested rather than use it on healthcare expenses may make sense to you too. But then again, your life (and health) could be very different from mine.
A personal perspective can help you ponder the possibilities, but my experience cannot provide you with enough factual information and data to make your own final decision.
I strongly recommend doing an analysis that evaluates multiple factors and variables in order to determine the best health insurance choice for your situation. I also suggest doing this each year during your open enrollment period, as both the plan options available and your personal health or circumstances can change over time.
If you are not sure where to start, you can do it yourself using online calculators like this or this option. In addition, insurance analysis is typically part of the comprehensive financial planning offered by paid financial planners.
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