It’s said that only two things in life are certain: death and taxes. I’m going to take the liberty of adding a third: health care costs will rise…and they’ll take health insurance up with them.
Some people take jobs just so they can get health insurance.
Since going without health insurance comes dangerously close to committing financial suicide, we have to have it, and the options for doing it affordably are limited. One of the most obvious ways to do this is by raising your health insurance deductible.
How much money can you save with higher deductibles?
The more risk you take on (by having a higher deductible), the lower the premium. This is true in every kind of insurance, from liability insurance to health insurance.
The best way to make the case for higher deductibles is by using an example. The scenario we’ll use will be done through Assurant. I’ve chosen Assurant because it has one of the most customer friendly websites you’ll ever find, not because I’m endorsing the company or its products in any way.
We’ll use a family, living in California, with two children, both parents are 35-year-old non-smokers. Under the company’s “popular” CoreMed plan, the monthly premium with a $2,000 deductible is $898. (Please keep in mind that the family deductible is $4,000—double the individual deductible—but more on that later.)
If we raise the deductible to $3,500, the monthly premium falls to $644. That’s a savings of $244 per month, or $2,928 per year.
If we raise the deductible to $10,000, the monthly premium falls to $441, saving $457 per month, or $5,484 per year. A deductible this high is basically “catastrophic insurance” since you’ll be on the hook for all but the biggest claims.
As you can see, a lot of money can be saved with higher deductibles. I’ve presented only three variations, but there are many others. You can go higher than $10,000, but if you do you’re coming very close to being uninsured on many common medical procedures.
If you have an individual health insurance policy, a deductible is a simple concept—one person, one deductible. But if you have coverage on your spouse and/or children, it gets more complicated.
Most policies with multiple beneficiaries contain two deductibles, one for each individual and one for the family as a group. For example, let’s say your policy covers you, your spouse and your two children. There’s an individual deductible for each person in the family—say, $2,000 per person. Then there’s a family deductible—say, $4,000.
If two people in the family incur significant medical treatment in the calendar year, you may have to pay as much as $4,000 in deductible expenses–$2,000 for each person. However, if all four members of the family have large medical expenses, your deductible would be capped at $4,000, the family deductible.
Unfortunately, in the language of health insurance, the term “deductible” is usually expressed as the individual deductible only. It may be said that your deductible is $2,000, but in reality it’s $4,000 since that’s the amount you could be on the hook for in a worst-case scenario.
Lowering the risk of a higher deductible
Health insurance deductibles are about risk. When we take a deductible, we’re betting that nothing will happen that will make us need enough health care that we’ll ever have to cover the deductible out of our own pockets. The higher the deductible, the greater the risk in the event that ever does happen.
Fortunately, risk as it pertains to deductibles can be precisely measured. If you raise your deductible from $3,000 to $5,000, you’re taking on exactly $2,000 in additional risk per individual. If the family deductible is twice the individual one, then you’re taking on $4,000 in additional risk. Since you know what the cost of the risk is, you can prepare for it.
And how you do that is through budgeting and savings. If you have enough in savings to at least cover the maximum deductible—and let’s use the family deductible, not the individual—then you have the risk fully covered. The larger your savings, the higher the deductible you can afford to have.
The type of savings you have will be important. It has to be pure savings–an emergency fund or “rainy day” fund—squirreled away someplace safe and liquid. Retirement accounts and investments don’t qualify since it can be almost guaranteed that your need to fully cover your deductible will coincide with a stock market crash.
When you should NOT raise your deductible
The main advantage to raising your health insurance deductible comes from the fact that in most years, you won’t use your health coverage enough that you’ll ever reach the full amount of the deductible. This assumes that you’re in good health and that you don’t lead a high-risk lifestyle. But that may not be possible for everyone.
If you have ongoing health conditions that require you to make heavy use of the health care system to the degree that you fully expect to hit your deductible every year, then raising your deductible will be the wrong strategy. If this is your situation, keeping your deductible as low as possible will save you the most money.
There are other ways to save on health insurance, but raising the deductible usually has the greatest impact. Talk to your health insurance provider and see what you can work out.
Kevin Mercadante is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.