No one likes the unexpected bills in life. A TikTok "star" making "content" behind the wheel sideswipes your car and speeds off, leaving you to figure out how to get the teal paint out of your passenger side. Or your overactive toddler plugs the bathtub and throws the faucet on full-blast, only to find out about his shenanigans when a water/drywall concoction plops on your head through the ceiling from the bathroom above. How about that pickup basketball game where you insisted on guarding the college kid, only to blow out your knee when he crossed you over because, well, your glory days predated the three-point line? Perhaps these circumstances are a bit far-fetched, but they all have a common thread - this is why you have insurance! It insulates you from major, unexpected expenses in your life. However, almost every insurance product in the world has an out-of-pocket threshold (deductible) for a given incident or over a period of time. That means you're stuck with either some or all of these expenses! This week, I'm going to focus on medical expenses and how to position yourself for handling these substantial costs.
I wouldn't recommend dumping your medication all over a table, for so many reasons!
Emergency Savings
Again with the emergency savings. At the risk of being a one-hit wonder, I'm going to harp on one of the best ways to protect against the surprise medical bill. Having a sufficient emergency fund is built for just these types of moments. While most of us have some form of insurance, plans vary greatly. The cost out-of-pocket for you may come as a major surprise. While there is no magical number for how much you should save, having enough money to meet your annual deductible would be a good start. The challenge is two-fold: setting aside enough to build this fund up, then having the discipline to leave this money untouched until a true emergency (i.e. unplanned medical expense) comes along. But it doesn't end there. You need to rebuild your savings after the emergency is paid off to prepare against the next incident.
Insurance Coverage Options
Depending on your personal circumstances, your health insurance options can vary greatly. For that reason, I won't delve too much into specific plan types. However, regardless of plan, it's critical to remain insured and understand your coverage. Here are some key terms to help you understand the key components of your insurance plan:
Premium - The amount of money you pay for coverage. If offered through a workplace, employers typically pay a large portion of the total cost and your share is deducted from your paycheck. The lower the premium, the better, but it may be indicative of less coverage.
Deductible - The amount of money you need to pay (often for a year of coverage, or by incident) before your health insurance covers your remaining expenses. The lower the deductible, the better, but may be indicative of a more expensive plan.
Copay - The amount you pay, in addition to what the insurance provider pays, for specific medical expenses (like a doctor's office visit). These are usually a fixed rate (e.g. $30/visit) and are negotiated as part of an insurer's rate with the medical office.
Provider Network - The collection of medical offices and professionals who accept your insurance. Always try to stay "in-network" when selecting a medical provider to ensure your insurance covers the highest possible amount of the overall costs.
Understanding these terms are critical, especially when deciding between plans. You may have the choice between a lower premium plan with higher deductible and higher copay, and a higher premium plan with lower deductible and lower copay. When considering the options, it's important to think through your anticipated medical needs in the upcoming year. Are you relatively healthy, or do you have ongoing medical needs? Is the coverage just for you, or do you have family to consider? How much risk are you willing to accept? In my experience, I would accept the risk of a high-deductible plans to save money when I was single and healthy. But now, as a middle-aged married man with two children, the math changes!
Health Savings Accounts (HSA's) and Other Strategies
One of the greatest personal financial tools in recent time in the U.S. is the Health Savings Account, or HSA. Think of it like a 401(k), in that you can contribute pre-tax money to your HSA that can be used for qualified medical expenses. On top of that, once you reach a minimum threshold, you can invest this money like you would in a 401(k) so it will grow over time. Best yet, the money doesn't expire! There is no time limit to use the money set aside - you can save it until you need it. If you pass away, your spouse can roll it over into his or her HSA. And when he or she passes, the money can go to their beneficiary, at which time taxes would need to be paid. Up until then, your money continues to grow in the stock market tax-free. Many employers offer this as an option along with a High Deductible Health Plan (HDHP). In fact, HSA's are such a good deal they're only offered in conjunction with IRS-qualified HDHP's. Some companies may even contribute to your HSA, which is an added bonus, but this counts towards your annual contribution limit.
You may have access to other health payment accounts like a Flexible Spending Arrangement (FSA), Health Reimbursement Account (HRA), or Medical Savings Account (MSA). And this is just in the U.S.! Regardless of what acronym, the important considerations are if the money is pre- or post-tax, does the money expire, and does your employer contribute to the fund. In most cases, if you can utilize these types of accounts to pay medical expenses, it will help you avoid a major hit to your personal finances.
Dough-Nuts Super Saver Special
Now, if you're really strategic, consider this choice. Say you have $10,000 saved in an HSA, and have a $4,000 medical bill. Do you pay it from your HSA, or use your emergency fund? Since the money in the HSA is invested, you're getting compounding interest over time. You could let that $4,000 continue to grow, knowing you will probably have another major medical expense later in life. If you could leave that $4,000 in your HSA for another 20 years, assuming 7% investment return, it would appreciate to over $15,000! Then again, if you couldn't easily replace the $4,000 in your emergency fund and had to take on credit card debt (~18-20% APR) to make ends meet, it was all for nothing. Of course, this would only make sense if you're contributing the maximum annual limit to your HSA each year; if not, it's a moot point because what you spend from your post-tax money could have gone back into your HSA. For those with the utmost discipline and income stability, this could be a slick financial play to set yourself up for future financial gains.
For those of you that came to read the continuation of my series on capitalism, I'll get back to that, but wanted to get some more content out that may be more time-sensitive as many of us are facing medical bills and have a little time to contribute to an HSA! Be well, be safe, and be merry!
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