Choosing Between Low and High Deductible Health Insurance Plans

With a wide range of plans in the insurance marketplace, choosing the right deductibles can be quite confusing. Should you select a low deductible with higher premiums or choose a high deductible to save money with lower premiums?

To ensure that you and your family have the most appropriate health care plan, you need to have a clear understanding of how the amount you pay in monthly premiums determines whether you pick a low or high deductible plan. In this article, you’ll learn the difference between these two deductibles, how they work and vital factors to consider when choosing the appropriate deductible.

Health insurance terms

Before we delve into more discussion, let’s clarify some key terms.

Deductible

This is the amount of money you have to pay the insurer for your medical care before the insurance plan starts covering costs. Your insurance company will start covering larger portions of charges once you meet your deductible, with the exception of certain free preventive care.

Premium

This is the monthly price you pay your insurance company to get health insurance regardless of whether you use it or not.

Out-of-pocket limit

This is the amount of money you will have to spend in a year (excluding premiums) for your medical care, provided you’re within your network. Once you meet this spending limit or cap, your insurer will pay 100% of in-network services covered by your health plan.

How low and high deductibles work

A deductible is the amount of money you pay to get a health care insurance plan before coverage kicks in. Remember, certain health insurance plans such as HMOs don’t come with a deductible.

Your insurance will pay you a co-insurance as a form of cost-sharing, once you have met your deductible. The insurance company will pay you co-insurance until you reach your cap of the out-of-pocket spending limit. The insurance company pays 100% of the covered medical services once the cap is met.

Note that the more you pay in health insurance premiums, the lower your insurance deductible because insurance plans act as a balance between your premiums and deductibles.

What’s the difference?

The main difference between low and high deductible insurance plans is the deductible amount. On the high end are plans with deductibles that are almost as much as their corresponding out-of-pocket limits. High deductible plans with the lowest premiums often have deductible limits of $5,000 or more. Although the costs of premiums vary, higher deductibles usually have lower monthly premiums compared to low deductible plans.

Lower monthly premiums are a definite perk of most high deductible plans, but there are some drawbacks.  For one, you will  have to pay a greater initial amount for your healthcare. Furthermore, with today’s rapidly escalating medical bill costs, meeting the requirements of a high-deductible health plan can be overwhelming. That is why high deductible plans often work well for healthy people without children.

A few visits to your primary care doctor won’t be a huge financial impediment because under the Affordable Care Act, preventative care is free. Moreover, most health care plans will allow you to visit your physician for preventative services with a co-pay instead of paying for your deductible.

Investment opportunities

Note here that the deductible health plan you choose will affect your health savings account (HSA) eligibility. You can only be eligible to contribute to HSAs if you have a qualifying high deductible health plan (HDHP). You can direct funds from your salary into an HSA pretax because HSAs are tax-advantaged. Or, you can deduct taxes after adding the funds post-tax. Moreover, your employer can contribute to your HSA.

When invested in mutual funds spent on qualifying/covered medical expenses or invested in stocks as defined by the IRS, HSA funds can earn you interest. You’re eligible to contribute to one provided you don’t have other health coverage options and actively qualify for a high deductible health plan. The IRS has set certain rules for qualifying HDHPs such as minimum deductibles and out-of-pocket spending limits for both individuals and families.

Other health insurance factors

Apart from the monthly premiums and deductibles, there are other factors to consider when choosing between low and high deductible insurance plans.

High deductible plans or consumer-directed plans are designed to encourage people to shop around for the right health care. The idea behind these plans is that if a consumer is held responsible for his/her upfront medical costs, he/she will research thoroughly in the marketplace to find lower-cost insurers. This cuts expenses for both consumers and providers.

According to the Urban Institute, however, most consumers with HDHPs reduce costs by skipping out on care. Meaning, the goal behind high deductible health plans hasn’t really panned out as expected.

While the higher premiums of low deductible plans can be hard to fit into a monthly budget, these deductibles offer consumers more generous coverage and predictable costs. Regardless of the deductible plan you choose, don’t do it at the expense of your health.

Who should consider a high deductible plan?

A high deductible plan can save you some cash up front and may be a good fit for you if:

• You rarely get sick or injured
• You’re healthy
• You can afford to open an HSA and make monthly contributions
• You’re interested in utilizing an HSA as a form of saving and investing your paycheck
• You are in a position to pay the deductible amount upfront within 30 days after you receive a bill for an unexpected medical expense

Who should consider a low deductible plan?

Although low deductible plans attract higher premiums, they can be the right fit for you if:

• You take expensive prescription drugs
• You need to see your physician more frequently due to a chronic condition
• You plan to undergo a reparative surgery such as a hip replacement
• You participate in high-risk sporting activities
• You are pregnant or planning to get pregnant
• You have small children

It is important to remember that if you fail to pay your monthly premiums, you may lose your health care coverage and owe a penalty for not having a health care insurance plan. If you doubt your capacity to pay your monthly premiums on time, it is better to consider a high deductible with lower premiums than to lose your health care coverage altogether and perhaps risk getting a full price medical bill.

There’s no right answer here. Consider your finances and your family’s health needs, and do thorough research before committing. After all, few things in life are as critical as your health and well-being.