Many Americans grapple with rising healthcare costs, and while premium increases are often to blame, the popularity of high-deductible insurance plans is also a factor. In fact, 66% of insured Americans today have deductibles above $1,000, according to a new report by real estate service Clever.
As a reminder, your deductible is the sum you must pay out of pocket before your insurance company starts picking up the tab for your services. High-deductible health plans often come with lower premiums, but for those who get sick often or require a lot of medical care, they're often far from a bargain.
According to Clever, the average annual deductible for individual coverage in 2007 was $714, and at the time, 81% of enrollees in that category had a plan with a deductible of less than $1,000. In 2018, by contrast, the average annual deductible was $1,573, and 67% of insured individuals were on a high-deductible insurance plan.
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If you're stuck with a hefty deductible, you're no doubt aware that it can make for a very stressful financial situation when you encounter medical expenses you're forced to pay for in full until your insurance plan kicks in. But there is one way to capitalize on a high-deductible health plan, and save yourself some serious money in the process: Sign up for a health savings account.
Save money while saving for healthcare
Many people are familiar with flexible spending accounts, or FSAs, which let you allocate funds for medical expenses that must be used up year after year.
Health savings accounts, or HSAs, work differently. With an HSA, you contribute money to pay for immediate healthcare costs, but the funds you don't use in the near term can be invested for added growth and carried forward indefinitely. You can even use an HSA as a retirement savings plan.
Best of all, HSAs offer a number of tax benefits. Like FSAs, contributions go in tax-free, which means the IRS doesn't tax you on that portion of your earnings. Furthermore, investment growth is also tax-free, as are withdrawals, provided that money is used to pay for qualified medical expenses. And because HSA funds don't expire, there's less stress in deciding how much to contribute from year to year. You just need to pay attention to the annual limits set by the IRS.
For 2019, those limits are $3,500 for individual coverage and $7,000 for family coverage, plus an extra $1,000 for workers 55 and over. In 2020, these limits will increase to $3,550 a year for individual coverage, and $7,100 a year for family coverage. And workers 55 and over will still get that additional $1,000.
But here's the thing about HSAs: Only those with high-deductible health insurance plans qualify to participate. For the current year, you must have a deductible of $1,350 or more as an individual, or $2,700 or more as a family, to fund an HSA. For 2020, these limits are increasing to $1,400 and $2,800 respectively.
Take advantage of that high deductible
Though a large deductible can put a strain on your finances, the silver lining is that you may qualify to participate in an HSA. And that introduces a world of savings you can benefit from.
