by Andrew D. Schwartz, CPA
You purchase insurance to protect yourself against the catastrophic. Paying a few hundred dollars to fix a broken window in your garage won’t trigger a financial crisis for most households. Being forced to rebuild your two-car garage after it is flattened by a fallen tree is when you look to your homeowner’s insurance to come to the rescue.
Protection against the catastrophic describes long-term disability insurance as well (see my previous article if you’d like an overview on long-term disability insurance). Miss a few days of work due to the flu, and you won’t be financially devastated, even if you have already used up all of your PTO (Paid Time Off) for the year. How financially devastating would it be if you end up missing a chunk of time at work and do not have adequate disability insurance coverage in place?
Assuming the purpose of insurance is to protect yourself against the catastrophic, please explain what happened to the health insurance industry. Most plans pay pretty much all of your health costs each year. Yes, you get hit with co-pays and a relatively modest annual deductible. But that’s about it for most people with traditional health insurance coverage.
When you think about it, however, there is a very good reason as to why the health insurance industry evolved into more of a payment program than a true insurance product. Leaders of the healthcare industry realized that it would be less expensive in the long-run for insurance companies to encourage people to seek out preventative care instead of paying for costly medical care that could have been avoided with earlier detection.
Now that consumers are better informed about preventative healthcare, let’s review a strategy that helps people not only reduce their health insurance premiums but also build up money within a tax-advantaged savings account.
Back in 2004, President Bush introduced Health Savings Accounts (HSA). Only individuals or families covered under a high-deductible health insurance plan during the year are eligible to contribute to an HSA. For 2012, the minimum annual deductible to qualify as a high-deductible plan is $1,200 for individuals or $2,400 for families.
Here are four tax breaks available to you if you contribute to an HSA:
- Money contributed into an HSA is tax-deductible. Either you contribute into an HSA on your own, or your employer contributes on your behalf.
- Money invested within the HSA is your money and grows tax-deferred. Unlike Flexible Spending Accounts (FSA) offered to you as part of your employee benefit package where you set aside a set amount of money to pay for your family’s healthcare costs with pre-tax dollars, there is no “use it or lose it” pitfall with HSAs.
- Money can be withdrawn tax-free from your HSA at any time to pay for your family’s healthcare expenses.
- Any money remaining in your HSA upon your reaching the age of 65 is available to subsidize your retirement.
In my next post, we’ll look at why HSAs are a great Bang for your Buck.