Is a High-Deductible Health Plan a Good Idea? 

As we prepare for open enrollment season for health insurance and other benefits, it’s important to understand our options. (And yes, we know it’s easy to scroll right past the HR emails explaining the various plans offered by some employers.)

But here’s the thing. It pays to know where your money is going. Research shows that many Americans underestimate how much they spend on everything from health insurance premiums to deductibles and other out-of-pocket medical expenses. It’s no secret that healthcare costs are soaring. In 2022, an employer health benefits survey from KFF found the average premium for single coverage was $7,911 for the year. And for families? Hang on to your hat. That average premium clocked in at $22,463 per year.

With those figures fresh in your mind, why not make this the year you dig in and get more strategic when it comes to healthcare spending? We’ll help you do that by looking at high-deductible health plans (HDHP), and who may benefit the most from this type of insurance coverage.

Who should consider a high-deductible health plan?

Generally speaking, these health insurance plans tend to cost less than other plans and may be best for those who don’t typically have a lot of medical expenses or chronic conditions such as diabetes or heart disease. They can also be a good fit for someone who can’t afford a more expensive health plan because they are often the most affordable ones available.

Benefits of high-deductible health plans

Certified financial planner Marianne M. Nolte, owner of Imagine Financial Services in Fallbrook, California, notes one big benefit of an HDHP is that you can take advantage of a Health Savings Account (HSA) and start putting additional dollars away. Funds in a HSA can be used tax-free to pay for medical expenses. And If you don’t have immediate medical needs, the HSA continues to grow tax-deferred.  If it grows long enough it can turn into a supplemental retirement account.

While technically anyone can benefit from an HSA, these accounts have a greater impact on higher income earners with higher tax rates, says Chris Diodato, founder of WELLth. Why’s that? Typically, HDHP participants contribute to an HSA and deduct the contributions from their taxable income.

That means someone earning $20,000 (with a combined marginal tax rate of around 20%) would save $1,000 in taxes if they made a $5,000 HSA contribution, Diodato says. On the other hand, if someone with a $300,000 income makes a $5,000 contribution, they would save $2,250 in taxes, assuming their tax rate is closer to 45%, he notes.

Drawbacks of high-deductible health plans

One potential problem with high-deductible plans, says Francisco Ayala, a financial life planner with The Coleridge Group, is that ‘’people sign up for it looking to lower their premiums without fully understanding the implications.’’ Not only are deductibles a lot higher compared to other health insurance plans, he says, but the out-of-pocket maximum is also higher at $7,500 for individuals and $15,000 for families in 2023.

For comparison, some mid-level insurance plans in the U.S. offer families annual deductibles in the $3,000 to $4,000 range. So if you choose a high-deductible plan and don’t have a fully-funded emergency savings account, Ayala warns, you could be one accident and a giant hospital bill away from financial disaster.

Consider your situation 

When discussing health insurance plans with clients, Ayala asks them what’s on the horizon that could potentially influence healthcare costs.

Will you need more medical care than usual next year? Those who are looking to start a family or have elective surgery may want to hold off on opting for a high-deductible plan until later, he says, when they expect medical costs to go down.

How healthy is your savings account? Do you have enough in savings to cover the higher deductible and out-of-pocket max? It’s wise to have the full deductible amount and at least half of the out-of-pocket maximum set aside in an accessible savings account in case it’s needed.

Learn more

If you don’t have a financial coach or planner to help guide you, there are tons of resources available to assist in determining the best healthcare plan to meet your needs in the coming year. Check out sites such as healthinsurance.org and HealthCare.gov to learn more.