Health insurance falls under the umbrella of money management in the sense that it’s a financial decision and one that comes with very serious consequences.
And for that reason, I’m covering the health care basics in this post. I cover a lot of health care information that’s good for anyone just getting started in their adult lives, tackling this on their own.
Here are 9 health care terms that you need to know.
Your health insurance premium is the amount that you pay out of pocket before your insurer pays its share (this is the amount that you see on your pay stub being taken out for health care).
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A health insurance deductible is the amount of money that you pay out of pocket before your plan pays. The amount of the deductible will vary based on the specific policy. Generally, the higher the premium the lower the deductible.
After your deductible is met, you will be required to pay coinsurance. Coinsurance means that you pay a certain percentage and your insurance provider pays a certain percentage (often this is the 80-20 split, meaning your insurer pays 80% and you pay 20%) up to a certain limit.
Once you’ve reached your coinsurance maximum out of pocket limit, then your insurer will generally pay 100% of your health care costs.
Your copayment is a flat dollar amount that you pay each time you have a medical service. Copays typically do not contribute towards any policy out-of-pocket max, whereas coinsurance payments do. The underlying idea is that without a copay, people will seek much more medical care than they otherwise would if they had to pay a copay. Think of copays as what it costs you to get the specific service you’re seeking.
5. Low Deductible Plan
A low deductible plan (or even a no deductible plan) means that there is a small amount (or no amount) that you pay before your insurance kicks in. Under a low deductible plan, your premiums are higher. Generally, these plans are good for people who expect to need at least a fair amount of medical care (or more) or who have young children (because kids go to the doctor and get sick a lot).
6. High Deductible Plan
A high deductible plan means that you are responsible for a greater amount of the health care costs up front compared to if you were on a low deductible plan. You will pay 100% of health care costs until you reach your deductible. The benefit to you is that you pay lower premiums with a high deductible plan. Generally, high deductible plans are good for healthy people who don’t go to the doctor often and who don’t have young children.
7. Health Savings Account (HSA)
A health savings account (HSA) is a feature of a high deductible health plan (i.e, you must have a high deductible plan to qualify for an HSA). This goes for your spouse, too. Your spouse can only be on the HSA if he is also under the high deductible plan.
Specifically looking at the HSA itself, a health savings account is a bank account that you open in your name at a financial banking institution for money to be directly deposited from your paycheck before taxes (your employer may even contribute or match, too) to pay for qualified health care expenses. The HSA belongs to you (not the insurer). There are maximum amounts that you can contribute to your HSA every year. Money in your HSA is there for good (you don’t lose it at the end of the year – unlike an FSA). Even if you leave your job where you had your HSA, you still keep the account and the money. You can continue to use your account just as you would if you were still with your employer.
You can use the money from your HSA toward your deductible in addition to using it on other qualified medical expenses in the future. If you want to withdraw the funds from your HSA for non-qualified medical expenses, then you will pay taxes on any gains in addition to paying a 10% penalty (and any other penalty that I’m not currently aware of).
The benefit of an HSA is that it helps you save money for health care costs in addition to reducing your tax burden. Your HSA is a savings account that will grow, but keep in mind what your interest rate is. While your money is pre-tax in this account, it really won’t be building you wealth with .05% interest rate. That’s why I prefer to keep insurance separate from investments. Generally, the HSA is good for saving for health expenses, not saving in general.
8. Flex Spending Account (FSA)
A flex spending account (FSA) is a feature that your employer may or may not offer. You do not have to have a specific health care plan for the FSA – your employer just has to offer it.
The benefit of an FSA is that you can contribute money to your health care pretax up to a certain limit (determined annually). As Suze Orman says, “If your employer offers a flexible spending account (FSA) for healthcare, you’re nuts not to take advantage of it.” For example, if you contribute $2,500 and you’re in the 25% federal tax bracket, then you save $625 in taxes that year. If you would’ve spent that $2,500 on health care expenses anyways, it only makes sense to get this money tax free.
With an FSA, you elect to contribute a specific dollar amount for the year, which will then be taken out of your paycheck pretax. However, the account is typically prefunded. This means that if you elect to contribute $1,000 for the year, then you will contribute roughly $83.33 / month ($41.67 / pay). While you won’t actually contribute the full $1,000 until the end of the year, that $1,000 is generally available to you at the beginning of the year. So, you can use your FSA money before you’ve funded it. And don’t worry, you won’t have to repay it if you leave your job during the year either .
Generally, you can use your FSA money to pay for qualified medical expenses throughout the year. You’ll need to keep your receipts because often they will ask for you to submit your receipt. Unlike the HSA, the FSA money is “use it or lost it”, which means that at the end of the year, the money is gone. The money is only available throughout the year – it doesn’t carry over into the next year. Therefore, it’s usually wise to underestimate your contribution amount so you don’t lose money that you contributed. Keep in mind that there is a wide variety of qualifying expenses, including over the counter items that you can use your FSA for if you need to use the money before the end of the year. Be sure to check the list before you use your card for expenses to avoid being rejected.
9. Health Reimbursement Arrangement (HRA)
A health reimbursement arrangement (HRA) is an account similar to an HSA, except that your employer contributes the money and it is not counted as your income (saving you tax dollars). You can use the money to pay for deductibles and co-insurance, and other medical expenses. Like an HSA, money can be carried over from year to year (it’s not “use it or lose it” like the FSA).
A Final Note!
I am not super passionate about health insurance, and chances are that you are not either. But, that doesn’t mean either of us is off the hook about learning this stuff (unfortunately!).
Personally, I like traditional plans but I am young and healthy. I just happen to be high maintenance with doctors and would rather pay a higher premium than 100% out of pocket up to a high deductible. I also love using an FSA because it’s basically free money – it just takes effort on my part to set it up and keep my receipts.
Bottom line — Know your stuff. Know yourself. Make the best decision for you.