Low or High Deductible: Which Health Insurance Plan Is Right For You?

In this edition of our weekly finance column "Bank of Dad," we answer questions about health care plans and how to know when you're on the right financial path.

by Daniel Kurt
Geo Barnett for Fatherly

Hey Bank of Dad, I have two health care plans at work. Is it worth paying a higher premium for the top-level plan in order to get a lower deductible and coinsurance? — Carlos, Coral Springs, Florida

Make no mistake about it: the choice you make during the open enrollment period can have a big impact on your checking account. And yet, a lot of employees choose a plan without giving it a whole lot of thought.

If you’re optimistic about your health, you’ll tend to go with the high-deductible plan that gives you a lower monthly premium. If you’re risk-averse, you’ll likely opt for a top-tier plan, even though it means a bigger withholding from your paycheck.

A better approach is to base your decision, as much as possible, on your projected healthcare expenses. Looking at your medical claims from prior years will give you a good baseline – and many insurers have websites that will let you do so with relative ease. Of course, you’ll also want to factor in any one-off needs, whether it’s a pregnancy or an elective surgery, that could alter your spending.

High-deductible health plans, which can be paired with health savings accounts, have become more common over the past few years. Rebecca Kennedy, a fee-based advisor with Kennedy Financial Planning in Denver, says HDHPs make the most sense for healthier individuals who have excess cash that they can use for out-of-pocket costs. Health savings accounts — which offer the triple advantage of tax-deductible contributions, tax-deferred growth and tax-free withdrawals — are certainly a smart place to park those funds in the meantime.

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But Kennedy cautions that high-deductible plans aren’t necessarily right for every family. By law, HDHPs have deductibles of at least $1,350 for individuals and $2,700 for families. And in many cases, they’re much higher than that. So those who face an unexpected medical crisis could face monstrous bills. “You really need to have strong emergency reserves for that to be a good fit,” says Kennedy.

That said, you should avoid the assumption that plans with lower deductibles (often PPOs) will necessarily save you money if you consume a lot of medical care. In some cases, the extra premiums you pay end up exceeding the difference in the annual deductible. What’s more, HDHPs sometimes have out-of-pocket caps that are similar to, or even less than, their lower-deductible peers.

Last year, a pair of researchers from the University of Wisconsin studied insurance options at 331 companies. Amazingly, they found that high-deductible plans would result in lower maximum costs at 65 percent of those firms.

So it’s worth stress-testing your health plan by coming up with a worst-case scenario and seeing if the higher-tier plan actually saves you money in the end.

Bank of Dad, I have some good investments (401k, IRA), a solid rainy day fund, some savings accounts for my kids, and a steady job. We pay the bills, save money, and still have some fun. But I still fear that I’m going to retire into squalor. I guess what I’m asking is: how do I really know if I’m on the right financial path? What should I concern myself with most? What should I stop worrying about? — Ben K., Portland, ME

I want you to take a long, deep breath here, because it sounds like you’re doing just about everything right when it comes to planning for your eventual retirement. At most, all you need is a little fine-tuning.

When it comes to investing, there are really two big questions to ask yourself: 1) How much am I socking away and 2) Where am I putting it?

You mentioned that you’re already taking advantage of a 401(k) and IRA, which is a great start. The rule of thumb that a lot of advisors suggest is to put away at least 10 to 15 percent of your paycheck, starting when you’re in your 20s. If you didn’t exactly get off to a great start after graduation, consider boosting that percentage a bit to make up for it.

Even better, use one of the many investment calculators available online and plug in your specific numbers. Based on your current account balances and annual contribution amount, that should give you a pretty good idea of how much you’ll have by retirement age (though it requires some guesswork on how well the market will perform over that time).

Almost as important as how much you save is how well you allocate that money. If you’re still in the first half of your career, you’ll probably want to skew your portfolio toward stocks, which will help maximize your returns over the long haul. A fairly middle-of-the-road axiom would have you owning an 80/20 split of stocks and bonds at age 30, though you can tweak that slightly based on your specific goals and risk tolerance.

Younger workers have time to wait out any temporary dips in the market. As you get older, though, you’ll want to gradually increase your investment in bonds – and even some cash – as your needs switch from wealth accumulation to wealth preservation.

Beyond that, is largely a matter of avoiding any major missteps, like pulling money out of your retirement accounts for unnecessary expenditures. Of course, it’s also an imperative to have disability coverage that’s sufficient to cover your expenses in case you endure a long-term illness (along with having life insurance to protect your dependents).

But kudos to you – it sounds like you’re already on the right path. As long as you get the big decisions right, I’m sure you won’t be destitute after you leave the workforce.