Fall is one of my favorite times of the year: the leaves start to change color, the temperature starts to drop…wait a minute, actually none of that is true since I live in California and it topped 90 degrees at the beaches last week! November is my favorite time of the year for a different reason: Annual Enrollment.
For the past 5 years of my corporate life, I’ve truly enjoyed annual enrollment because it gives me a chance to step back and assess how much money I’m going to save (and really make) in the upcoming year. For those who don’t know, I switched from a PPO to an HSA back in 2010 and it was one of the best moves I’ve ever made. Here’s why.
My Insurance Philosophy
I don’t think most people understand how insurance works. Here are the cliff notes: the premiums you pay have to go towards all of the payouts an insurance company makes, the company’s overhead, salaries, advertisements and any profit they might take home. So by that definition, the average policy holder will get less (and usually a lot less) than what they put in. Those are the facts.
For this reason, HSA’s likely won’t ever catch on because they require too much math. But if you can do some simple math with me, you’ll likely see the enormous benefits of opting for this type of plan. My insurance strategy is actually pretty simple with regards to HSA/HDHP’s and it really applies to all aspects of life: pay for the things you can afford and insure against the things you can not.
I can afford a lot. I might not want to pay $5,000 for a hospital bill but I can definitely afford it. Any time you involve insurance into the mix, you know that you’re generally going to get less than if you would have paid for it on your own. So basically I insure against the catastrophic type events and self-insure the rest.
HSA’s Are The Perfect Tool If You Like Your Money
I won’t get into the nitty gritty of why HSA’s are so great since I’ve already written extensively on the topic but there are a lot of reasons why they might make sense for you. I’m going to take a look at my plan and show how the HSA option is going to benefit me going forward.
The Facts Of My Plan
My employer offers a wide variety of plans but here are the pertinent details for the HSA (these are all the numbers for a family plan too since I’m now married!)
- Employer Contribution: $1,200
- Bi-monthly premium: $0
- Deductible: $2,500
- 10% co-insurance after the deductible for most services/appointments
- Out Of Pocket Max: $5,700
- All preventive care is covered
- 2015 Family HSA Limit (employer + employee contribution): $6,650
Note: If I were to opt for the PPO Plan, my premium would be $22.50 or $585 per year.
Let’s Do Some Math
Now here’s where it gets fun (for me at least). By opting for the HSA plan instead of the PPO, I will automatically make $1,785 with one click of a button. That money comes from my employer’s contribution ($1,200) and the premium savings ($585) of opting for HSA instead of PPO. Most people forget to include the latter in their analysis.
So right off the bat, if my wife or I don’t see a doctor next year, we will make $1,785. That sounds like a great deal doesn’t it? It is. Remember, HSA plans reward young and healthy individuals who rarely have to go to the doctor. If you get sick a lot, you want to be on a PPO type plan where there are a bunch of healthy people who will subsidize your health care.
That’s the only way to really take advantage of insurance: if you know you’re going to be sick a lot. But the problem with PPO’s is that a lot of people have the mindset of ‘getting their money’s worth’ so that’s a big reason why premiums go up each and every year. You don’t see the same type of premium increases with HSA/HDHP’s.
Why I Like The HSA/HDHP Combo
The reason why I like the HSA/HDHP combo is because it rewards people who shop around for medical services and the less you see the doctor, the more money you get to keep in your pocket. Even though you get a free $1,785 per year, once that money hits your account it’s a whole different story. As I discovered when I injured my knee earlier, when you have to pay for things, an estimate of $200-$600 for a first visit just isn’t acceptable.
When you have regular PPO insurance, you don’t have the incentive to shop around since you never see the actual cost of the bill. The insurance ‘pays for it’ and then raises everyone’s premiums the next year to make up for it.
The 2015 family limit for HSA contributions is $6,650. So after the $1,200 in employer contributions and the $585 in premium savings (which I will contribute to my HSA), I will be contributing an additional $4,865 per year to my HSA or $187 per paycheck.
That might seem like a lot, but to me it’s a no brainer. I generally recommend maxing out your HSA after 401 (k) match because it is the only account that is TRIPLE-tax advantaged. The money you put in isn’t taxed, the money you earn isn’t taxed and the money you take out isn’t taxed as long as it’s used for medical purposes. And since we all know the direction that the cost of health care is headed I can assure you that you will use this money at some point in your life.
Another Benefit of Getting Married
The increased family contribution is just another awesome financial benefit of getting married. And I actually take the HSA one step further since I pay for all of my expenses with after tax dollars instead of my HSA. There is a provision that will allow me to withdraw that money at ANY point in the future.
So let’s say I spend $500 on medical related expenses in 2015 but pay with my credit card. I can keep the $500 in my HSA (that I would have spent) and invest it in an index fund and take out that same $500 in 40 years and spend it on WHATEVER I WANT completely tax free. All of the earnings on that $500 in my HSA account can now be used tax free too as long as it’s on medical purchases.
If I would have originally withdrawn $500 from my HSA to pay for those expenses and invested the after tax $500 in the same index fund I would have to pay long term capital gains taxes on the earnings (plus taxes on any dividends throughout the years). If I assume a 5% growth rate, that $500 will grow to $3,519 after 40 years. So my earnings will be $3,019 and if I assume a 15% LTCG, then I just saved $530.
Now imagine how much money you can save if you add up all of the thousands of dollars in medical care you’ll have over your lifetime. I actually don’t even rack up many medical expenses, but since HSA’s can be used for other ancillary medical services I have a ton of saved receipts for things like new contacts, contact solution, medical massage, acupuncture, physical therapy, etc.
Readers, how does my HSA plan compare to yours? I already know that I’m very luck to have such a generous HSA plan but even if it wasn’t so generous, I would likely still opt for it. If you’re interested in reading more of my HSA articles, you can find them here.
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-Harry @ PF Pro