Monday, January 21, 2008

Make the most of your money when buying health insurance

I will admit it, health insurance is expensive, but the alternative is even more expensive. But what are people supposed to do, when the costs keep soaring, but our paychecks stay relatively still? Here's what I did.

The first important step, is to have an emergency fund established. My wife and I currently have a couple thousand dollars saved away. Once this is done, it makes the next step easier (you can skip the emergency fund step, if you want to, as you will probably be able to save money faster, but it does come with a little risk, if you get sick or injured prior to having enough saved up).

The next time that open enrollment comes to your employer, take a good look at the difference in your monthly costs, with a high deductible plan. When I say high deductible, I mean like $1000+. When I started my current job, I looked at each deductible available, and what my employer contributed, and what I would have to contribute. The $1000 deductible caught my eye, as I had nothing to pay for it, as my employer contribution paid the entire premium for me. This was looking good, plus I had the money in savings, in case something big came my way, health wise. But, did it really make much financial sense?

Closer examination showed it did. If I were to take a $250 deductible, I would have had to contribute about $125 a month, whether I ever used the insurance. It was gone, money I would never get back, all for the psychological benefit of having a "low deductible". So here I was, looking at a $1500 expense, just so I could say I had a low deductible...and if I needed to use the insurance, I still had to pay that first $250, so my total yearly cost for my insurance would be $1750.

By having the $1000 deductible, I had no monthly premium to pay, so I took what would have been deducted from my paycheck, and saved that each only took me 8 months to save my deductible. That's an extra $500 a year I was able to save for something else, compared to what I would have paid with a smaller deductible. Add to that the fact that I would not have the additional deductible of $250 as well, so I saved $750. In addition, if I was not sick that year (I wasn't), that extra money I would have paid was not lost to me...I still had my deductible of $1000 sitting in an account, just waiting for me, if I ever needed it. So that second year, I saved $1750, because I did not have to pay anything for my premium, nor did I have to save my deductible up again. I also put that money to work for me. By putting it into a high yield money market account, I also had what would be used as my deductible, should I be sick, working to make me some money as well, in the form of interest earned.

As I mentioned earlier, this is much easier if you already have an emergency fund saved up, as you don't have to worry about coming up with your deductible in the event you are sick. That said, it only took me 8 months to save up the deductible based on what I saved monthly from not having to pay premiums. So if you need to go this route, because you don't have an emergency fund yet, it won't be that long that you go without a fully funded deductible sitting there waiting for you to use it.

I will also mention health savings accounts and medical savings accounts. Both are savings accounts for approved medical expenses (ie deductibles, etc) that you can make tax-free contributions to. MSA's will let you roll over any unused portions to the next year or withdraw unused funds at the end of the year, as taxable income. The HSA's will allow basically the same thing, but tax you on undocumented medical expenses, plus assess a 10% penalty, unless you are over 65 years old. Personally, I figured it was easier to just have it in my emergency fund, where I could get to it for what I needed, when I needed it, without having to worry about whether or not it was an "approved" expense, or making sure it was rolled over properly, etc. I did not mind being penalized for this, in the way of having my emergency fund filled with post-tax monies, but that was a personal may not be right for your situation.

So, the next time you get to change your insurance, take a good look at it, and see if you won't actually come out ahead, by having a higher deductible.

No comments: