Archives for August 2010

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HDHP Insurance: When Does a High-Deductible Health Plan Make Sense?

With many employers, you’re given two choices for health insurance:

  1. A High-Deductible Health Plan (HDHP), or
  2. A traditional, copay-based plan with a higher monthly premium.

Which plan is likely to be better for you depends on your healthcare costs. The lower you expect your healthcare costs to be, the more attractive an HDHP becomes relative to a copay plan.

The goal is to answer this question: How high do my healthcare costs have to be before a copay plan makes sense? To figure that out, we calculate the break-even point: the point at which your costs will be the same regardless of which plan you use.

Let’s say your choosing between two plans:

  1. An HDHP with a monthly premium of $112 and an annual deductible of $1,750, after which the insurer picks up 80% of costs. (This is actually my own plan, purchased through eHealthInsurance.)
  2. A copay plan with a monthly premium of $287, a $15 copay per visit, and no deductible.

In other words:

  • Your annual out-of-pocket cost for the HDHP would be $1,344 ($112 x 12), plus any healthcare costs up to $1,750, plus 20% of healthcare costs beyond $1,750, and
  • If we ignore the small copays, your out-0f-pocket cost for the copay plan would be $3,444 per year ($287 x 12).

Here’s how it looks visually:

So what level would your healthcare costs have to exceed in a given year for you to be better off with a copay plan?

$3,500, determined as follows:

  • Annual cost for copay plan = annual premium for HDHP + amount of healthcare costs you’d be responsible for with an HDHP.

Or plugging in the actual numbers:

  • $3,444 = $1,344 + X (up to $1,750) + 0.2(X — 1,750)

Solve that equation for X, and we get $3,500.

Or you can substitute your own premiums, deductibles, and coinsurance percentage to determine the break-even point for your own healthcare options.

Remember, though, that an HDHP plan carries more risk than a copay plan. With a copay plan, you have a pretty good idea of what your out-of-pocket costs will be for the year. With an HDHP, your costs can (and probably will) vary significantly from year to year, which can make budgeting somewhat more difficult.

HDHP Insurance and HSAs

One last point to consider when choosing between an HDHP and a copay plan is that, if your HDHP meets certain requirements, it will allow you to contribute to an HSA, thereby allowing you to use pre-tax money for healthcare costs.

In order to be eligible to make HSA contributions, your HDHP must have an annual deductible of at least $1,200 ($2,400 if it’s family coverage) and maximum out-of-pocket expenses of less than $5,950 ($11,900 if it’s family coverage).

Retirement Savings vs. Income Growth

Over time, I’ve learned that you folks are a sharp bunch. So I thought I’d pick your respective brains on a not-so-hypothetical question I’ve been struggling with:

How do you balance investing for retirement against investing to increase your current income?

For me, such income-increasing investments would be business-related: advertising, outsourcing articles, or faster hosting, for example.

If you’re not an entrepreneur, such investments would likely be career-related: picking up an important certification or attending conferences where you could make valuable contacts, perhaps.

Go for Higher Returns?

The reason I struggle with the question is that, in my experience so far, the money I’ve invested in my business has earned returns significantly greater than what one could expect from the stock market. Of course, many investments don’t pan out as hoped, but if I try enough things, one of them usually pays off nicely.

And from what I’ve seen, that seems typical of many career-related investments as well. A few hundred dollars here or a couple thousand dollars there can sometimes lead to a raise of that much per year — for the rest of your career.

Factoring in the Risk

Yet, most people don’t put all of their money into business or career-related ventures. (And I have no intention of doing so either.)

The reason, of course, is that such things are relatively high-risk. The greater the portion of your total net worth that’s tied up in one asset (whether a business or a career), the more exposed you are to an event that impairs the income from that asset.

Also, eventually, retirement isn’t optional. There comes a point where your body just isn’t willing to work (or work as much). Saving for that day is important, regardless of how much you enjoy your work and regardless of what return you can get by investing in your business or career.

What’s Your Method?

Between two Roth IRAs, a solo 401(k), and my wife’s plan at work, we’d be eligible to invest more than $50,000 per year in retirement accounts. Suffice to say, we don’t have that much money to play with. So, with regard to the money in question, we could:

  • Put all of it into my business,
  • Put all of it into retirement accounts, or
  • Split it up somehow.

So I’m very curious to hear your sagely input: How do you allocate between retirement savings and investments that you hope will provide increased income?

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