Health Insurance, Now in HD

We don't visit the doctor's office very often. We are savers. These two qualities make us perfect for a high-deductible health plan (HDHP). The HD clearly stands for high-deductible, but it also is to remind you that your yearly deductible could buy you a nice HDTV.

Why would we want such a high-deductible? For us, it is because of the low premiums. For example, a single person could pay $9/month for a HDHP versus $90/month for a standard plan. A family could pay $70/month for a HDHP versus $390/month for a standard plan.

With our HDHP, we pay 100% for prescriptions and doctor visits. Again, this is OK for us because we rarely need either. The amount we save per month more than covers these costs. And that is the theory: pay the low premiums, and save the rest for minor health care issues.

The HDHP became even more attractive with the creation of the health savings account (HSA). The government allows people with HDHPs to put pre-tax dollars into an account known as an HSA. The limit for HSA contributions in 2007 is $5650 for families if you have a deductible that they consider "high" (in 2007, at least $2200 for families). You can then use the money in your HSA -- which was never taxed -- to pay for doctor visits, prescriptions, over-the-counter drugs, etc. That is a pretty big benefit!

Many institutions allow you to invest some of your HSA balance in mutual funds, which means that your HSA can grow. Right now, we have a large enough balance to invest in mutual funds, but the fees don't make it worthwhile yet. We plan on having a portion of our HSA invested within the next couple of years.

Don't confuse the HSA with the MSA. You have to spend all of your MSA every year, or the money is gone. Not so with the HSA. The money is yours, whether you use it or not.

What if you end up having a large balance in your HSA? Again, you can always use the funds tax-free for qualified medical expenses. If you use the funds for non-qualified expenses before you are 65, you pay taxes AND a penalty of 10%. But, once you turn 65, the HSA functions a lot like an IRA. Your money has grown tax-deferred, so you pay taxes on withdrawals that are not qualified medical expenses, but you don't have to pay any penalties.

If a high-deductible health plan would fit your needs, it may be worthwhile to switch to one and save some money in the process. The HSA makes the deal even better. As heath insurance premiums continue to rise, the HDHP+HSA can be a good way to keep your costs under control.