Selecting health insurance is an important decision for everyone that requires careful consideration. As a quick overview:
- The majority of people receive health insurance through their employer-provided benefits.
- Those who are self-employed may have to purchase health insurance individually.
- If you retire before age 65, you will need health insurance until Medicare begins.
With various options depending on your individual circumstances, choosing health insurance can often be an overwhelming process. Here's how to choose the right plan for you and your family:
1. Select your plan type.
For many people, the most important factor is the cost of health insurance. HMO (Health Maintenance Organization) plans are the least expensive, offering a lower monthly premium and less out-of-pocket expenses for medical services. The designated primary care physician (PCP) serves as the “gatekeeper” and determines when you may see specialists. Thus, the downside is that HMO plans are the most restrictive.
PPO (Preferred Provider Organization) plans charge a higher premium in exchange for greater flexibility in choosing your providers. You do not need a referral to see any specialist and may use out-of-network physicians. However, you will incur higher expenses, and you may have to file a separate insurance claim. For further information about the HMO and PPO plans, click here.
Point of Service (POS) plans provide benefits of both the HMO and PPO plans. You choose what service, either HMO or PPO, to use each time you see a doctor. When you see an in-network primary care physician (PCP), you have no deductibles and preventive care is included, and he or she can refer you to a specialist. You also have the option of seeing an out-of-network provider, but with higher costs. If you like to manage your plan on a case-by-case basis, and are willing to follow strict guidelines, you may find the POS plan attractive.
2. To determine which plan best fits your financial situation, consider how the following expenses may impact your budget:
- Co-payments may be required each time you visit a provider.
- Co-insurance payments refer to the amount that the insured must pay for certain services, e.g., 20 percent of a hospital visit.
- Deductibles require you to pay a certain amount before the coverage kicks in.
- Policies have out-of-pocket limits, and these can vary greatly. The least expensive plans will have the highest limits, so don’t be fooled by the lower premiums. You could end up paying a large medical bill.
3. Review the accessibility of your preferred doctors.
Ideally, your preferred providers participate within your plan, especially your primary physician. If you see specialists on a regular basis, make sure that those within the selected plan are conveniently located.
4. Be aware that plan structures may differ.
Some plans may have primary, secondary and out-of-network tiers. Using providers within the primary tier will be the most cost-effective.
5. Utilize tax-advantaged medical spending accounts if available.
There are three main types of medical spending accounts: a Health Reimbursement Account (HRA), a Flex Spending Account (FSA) and a Health Savings Account (HSA).
A Health Reimbursement Account (HRA) is an employer-funded health spending account. Some plans may include an HRA to help cover the employee’s out-of-pocket expenses on a tax-free basis.
Many benefit plans offer the option of a Flex Spending Account (FSA) – an option to review when selecting your annual benefits. For 2018, you can fund up to $2,650 with pre-tax dollars to pay out-of-pocket expenses that must be exhausted by March of the following year. Over time, this results in significant tax savings.
Lastly, if you have a High Deductible Health Plan (HDHP), you can fund a Health Savings Account (HSA) up to $3,450 ($6,900 for family) in 2018. Those who are age 55 or older may contribute an additional $1,000 per year. You can also make a one-time IRA rollover to your Health Savings Account up to the contribution limits. All contributions reduce your taxable income.
If you retire before age 65, you can still fund a Health Savings Account. For example, you can fund an HSA from your pension, which will reduce your taxable income. However, unlike the FSA, you do not to have to deplete the Health Savings Account each year, so you continue to enjoy tax-deferred growth of your investments. But, be sure to discontinue contributions six months prior to enrolling in Medicare. Otherwise, you may incur a penalty.
Once on Medicare, you can use the Health Savings Account to pay the following expenses:
- Medicare Part B premium (Even if paid from your Social Security retirement benefit, you can reimburse yourself.)
- Medicare Advantage Plan (Part C)
- Prescription Drug Plan (Part D)
- Out-of-pocket expenses while on Medicare
- Long-term care insurance premiums
Selecting your health insurance can be a daunting task. By following the above guidelines and consulting the help of a CFP® professional, you’ll receive the guidance you need to determine which plan works best for you.