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Hsa Insurance Premiums Tax Deductible Question & Answers

2013 July 30
by Sarah Fields

Sharon asks…

What type of health insurance is best for me?

So, I’m a 25 year old individual, I’m about to graduate in May and I live in MI. I’m just learning about health insurance and I was wondering if anyone could tell me what you think would be the best type of insurance for my situation. I plan on staying here in the UP for a while bar-tending and not utilizing my degree just yet. Any suggestions? I would really appreciate it, thanks….This is all new and confusing to me.

Sarah Fields answers:

As a consultant specializing in insurance, here’s my recommendation:

1. Find a high deductible plan that has a health savings account (HSA) component. The HSA should be funded fully each year. It’s tax free money, and it can be used to pay medical expenses TAX FREE. Did I mention it was TAX FREE?

2. The high deductible should be about $3,000. That should save you about $250 / month in premiums. And if you take that $250 / month, and put it into your HSA, you will have $3,000 in your bank account TAX FREE.

3. The high deductible plan should be a preferred provider organization or “PPO” plan. That allows you to see any doctor or go to any hospital in the world, if necessary. (It makes a difference if you’re travelling to a different state or a foreign country.) I’d recommend a lifetime maximum of at least $2 million.

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Charles asks…

As far as health insurance is it best to get the highest or lowest deductible.?

I trying to apply for health insurance but i can’t find anybody that covers everything as far as dental and life insurance for a reasonable price.I also want to know if it’s best to get the highes deuctible or the lowest ar far as health insurance.And does anybody know any good providers?
I’m in the richmond,virginia 23220 area code.

Sarah Fields answers:

Apply for health care insurance separately from dental insurance to get the best deal. There is no such thing as a combination health insurance/life insurance to my knowledge.

If you are young and healthy, choose the high deductible plan because your premiums will be much less. Meanwhile, it’s very important that you take the savings from the lower premiums and set these aside in a savings account just in case you need to pay the deductible.

Check into a Health Savings Account (HSA). This is a tax-advantated savings account that you can use to pay the deductible. You must have a tax-qualified high deductible health care plan in order to have the HSA. Your contributions to the Health Savings Account give you a tax deduction, and your earnings are tax-free.

You can also use the HSA to cover dental expenses, whether you eventually get dental insurance or not. If you are young and healthy and you take good care of your teeth, you may be better off just using the HSA to pay for your dental.

However, one benefit of having dental insurance is that the insurance company negotiates a lower price with the dentist, and that will save you money.

Regarding life insurance, apply with a highly rated company (you want them to be around for awhile) such as Metropolitan or New York Life. Choose “term” insurance for the lowest rates. The agent may try to convince you to choose whole life or universal life, which is just life insurance combined with an investment. If you have extra money to invest, keep that separate from your life insurance, and just choose term life insurance. Go for the longest term you can get – if you’re young, that should be at least 20 or 30 years. Otherwise, you’ll have to renew your term at a higher age, and your premiums will be rated to your age at that time.

Mandy asks…

Could someone tell me how a high deductible health plan works?

I am confused with regards to how a high deductible health plan works, please help!

Sarah Fields answers:

A High Deductible Health Plan (HDHP) is a plan that conforms with IRS guidelines. It is used in conjuction with a Health Savings Account (HSA). As the name suggests, the deductible (the amount you pay before the insurance kicks in) is relatively high, but that means the premiums are lower.

Under federal law, the minimum deductible in a HDHP plan is $1,100 for an individual and $2,200 for a family. The advantage of an HDHP is that you can shelter up to $2,850 for an individual or $5,650 for a family per year from state and federal taxes in a Health Savings Account (HSA). You cannot use the tax-free money to pay the premium, but you can use it to pay the deductible and your part of co-insurance. Depending on your tax bracket and where you live, that could save you as much as $2,539 in taxes per year, assuming a combined tax rate of 44.95%—9.3% in state income tax (California), 28% in federal income tax, and 7.65% in Federal Insurance Contributions Act (FICA) tax. In other words, you increase your buying power by 45% by using tax-free dollars to pay your deductible, rather than using dollars with taxes taken out.

The contributions you make to an HSA are yours to keep, rolling over from year to year. The funds remain untaxed as long as you use them to pay medical expenses or withdraw them after age 65. The funds earn interest on a tax-deferred basis. Think of it as an IRA that you can use to pay out-of-pocket medical expenses.

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