For many people who get benefits through their employers, open enrollment at work has officially begun or is set to begin shortly. Meanwhile, open enrollment for those buying insurance themselves through HealthCare.gov begins on Nov. 1.
You’ll need to think carefully about the type of health insurance you’re signing up for. If you choose the wrong plan, it might cost you more than expected. Here’s why.
1. Choosing a plan with a low deductible might cost you more in premiums
Whether you’re buying a plan on HealthCare.gov or choosing one that your employer will subsidize, you’ll generally get the option to elect a low-deductible plan versus one with a higher deductible. And you may be inclined to choose the low-deductible option because the idea of a higher deductible can be scary.
But remember, when you opt for a low deductible, it usually means signing up for higher premium costs. And that could have you spending more money all in.
See, your health insurance premiums are an expense you have to bear no matter what. Your deductible will only come into play if you actually need medical care.
So, let’s say you choose a plan with a $1,200 family-level deductible and monthly premiums of $250. Let’s say you also have the option to get a plan with a $3,200 family-level deductible and $150 premiums.
The first option might seem like the better one initially. If you’re paying $3,000 a year in premiums plus a $1,200 deductible you have to meet, that’s $4,200. If you pay $1,800 a year in premiums plus you have to cover a $3,200 deductible, that’s $5,000.
But you may not have to meet your entire deductible. If you only end up paying $800 into your deductible, you’ll lose out financially with the low-deductible plan. In that case, you’re paying $3,800 all in, versus $2,600 on the high-deductible plan with the lower premiums.
2. Choosing a high-deductible plan could hurt you if you wind up getting hurt or sick a lot
In some cases, it pays to opt for a high-deductible insurance plan, such as in the example above. But that math only works if you’re someone who doesn’t tend to need a doctor all that often. If you have health issues or a gaggle of kids who constantly need the pediatrician, then a lower deductible plan could end up being more cost-effective.
Of course, you’ll want to look at costs like copays in addition to your deductibles and factor those into your decision, too. It may be that a higher-deductible plan also comes with higher copays that force you to dip into your savings account more so than with a lower-deductible plan.
3. Choosing a lower-deductible plan could mean forgoing the benefits of an HSA
Enrolling in a low-deductible plan might seem like the best choice. But doing so means giving up access to an HSA. That could hurt you a ton, because you’ll lose out on some important tax benefits.
Funding an HSA means shielding some of your immediate income from taxes. HSAs also let you invest your balance, and gains in these accounts aren’t taxed. So if you contribute $5,000 to an HSA next year and it grows to $30,000 through the years, you’re getting to walk away with a cool $25,000 profit without owing the IRS a dime.
Plus, let’s say your tax rate is 22%. A $5,000 HSA contribution saves you $1,100 by shielding that income from the IRS. So that’s something to factor into your calculations.
To qualify for an HSA next year, you need a minimum deductible of $1,600 for individual coverage and a minimum family-level deductible of $3,200. So even though you might risk spending more on a high-deductible plan if you end up needing a lot of medical care, consider the near-term and long-term tax benefits you’re giving up with a low-deductible plan.
It’s super important to choose the right health insurance plan — that should be obvious by now. So one of the best things you can do is give yourself ample time to review your choices. Don’t wait until the last minute to sign up for a plan, because the more rushed you are, the harder it might be to make a sound decision.
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