The last is the High-Deductible Health Plan paired with Health Savings Accounts. It offers many benefits to the person generally healthy and desiring to save on insurance premiums but having a tax-advantaged way of saving for future health care expenses. The biggest advantage for having an HDHP is its lower premiums every month in contrast to other traditional health insurance plans. This makes it an attractive option for those who do not believe they will need frequent medical care and desire lower premiums. You can save money on a tax-free basis to pay for qualified medical expenses, like deductibles, copays, and prescriptions, through the associated HSA. While the contributions to HSAs are tax-deductible, the money grows tax-free. Moreover, HSA funds not used are rolled over year to year; therefore, a person can build up substantial healthcare savings over time with this plan. Further flexibilities within this plan include that the money is available to pay for a wide array of medical expenses, and that money withdrawn from an HSA after age 65 is not penalized for any use, though non-medical withdrawal income will be taxed as ordinary income.
However, HDHPs with HSAs have their pitfalls that might make them not fit for everyone. High deductibles for the major coverage are major drawbacks. You will pay more money out of pocket before the insurance starts to cover your treatment. This might be quite substantial if you had unexpected health needs or have frequent medical services. Of course, for some, high up-front costs associated with the deductible outweigh lower premiums, mainly if they have not saved enough in their HSA to cover these expenses. In addition, although funds from HSAs can be spent tax-free for qualified medical expenses, they cannot be used for paying insurance premiums except under special circumstances, such as when one is buying COBRA coverage or long-term care insurance. Another potential disadvantage is that unless you save regularly in your HSA, you will end up with high out-of-pocket expenses and insufficient savings to pay for them.
Determining whether an HDHP with an HSA works best for you should take into regard your health, financial situation, and ability to contribute to an HSA. This combination can be cost-effective with regard to handling healthcare expenses if one is relatively healthy, comfortable managing higher out-of-pocket costs, and has the ability to contribute consistently to an HSA. If you expect frequent medical care or doubt your capacity to meet a high deductible, then a traditional health insurance plan with a lower deductible would be a better alternative.
