Including healthcare costs in your financial plan

How can I make sure I can cover healthcare costs?

Healthcare costs are high and growing, but your financial professional can help you prepare for the unexpected expenses that can come with injury or illness.

The Centers for Medicare and Medicaid Services¹ estimated that in 2019 the average individual spent some $11,582 per year on healthcare that’s including insurance premiums, doctor visits, hospital care, prescription drugs and other expenses.

Of course, healthcare costs can vary a lot from year to year. When you’re healthy, you may not spend much beyond health insurance premiums. However, if you get seriously ill or injured, you can rack up big bills, even if you have good health insurance.

Your financial professional can help you plan ahead for the unexpected by choosing insurance coverage carefully, putting money away for health costs and taking advantage of tax-advantaged savings vehicles like Health Savings Accounts. Here’s how to get started:

Understand your healthcare costs

Your first step towards managing healthcare costs is understanding them. The main components include:

• Health insurance premiums: This is what you pay every month for your insurance coverage. If you get your insurance through your job, your employer may subsidize part of your premium.
• Deductible: This is the amount you are required to pay for covered medical expenses before your insurance kicks in. Deductibles can range from a few hundred to many thousands of dollars depending on your plan. In 2020, one study found² that the average deductible was $4,364 for individuals and $8,439 for family coverage.
• Co-pays/Co-insurance: These are the amounts you’ll pay for medical services after you’ve met your deductible. They can either be a fixed fee—for instance, $5 to $10 per doctor’s visit—or a percentage of the total billed.
• Maximum out-of-pocket: This is the upper limit of what you’ll pay each year for medical services. After you hit this level, everything else for the year is free.

If all your expenses are covered by insurance, the maximum you can pay in any given year is the sum of your premiums, plus your maximum out-of-pocket amount. Your financial professional can help you calculate this figure.

Choose the right plan 

Different insurance plans have different features. Some have low premiums and high deductibles. Other have higher premiums and lower deductibles. Some cover a broad range of services, and other have more narrow benefits. 

To manage your costs, you’ll need to think about what kind of plan makes sense for you and your family. For instance, if someone in your household has a chronic illness, you may want to choose a more expensive plan with a low deductible and a wide array of specialists in network. If you are young and healthy, you may be able to save by choosing a high deductible plan. Talk to your financial professional about your specific needs so that he or she can help you find a plan that works for you.

Consider an ACA plan

If you don’t have insurance coverage through work, you may be able to buy subsidized care through the Affordable Care Act (ACA). The government provides subsidies that ensure that premiums for a mid-level insurance plan cost no more than 8.5% of your income³, and low- and middle income buyers can find basic plans for less or even free. Go to healthcare.gov to find out more 

Think about an HSA

High deductible plans—which the IRS defines⁴ as plans with deductibles above $1,400 for individuals and more than $2,800 for a family—can be a good, relatively affordable way to obtain basic coverage. However, it’s important to be able to cover your pre-deductible costs. Fortunately, there’s a terrific, tax-deferred vehicle that can help you do that. It’s called a health savings account or HSA.

An HSA enables you to make a tax-deductible contribution⁵ of up to $3,650 per year for an individual plan or up to $7,300 for a family plan. That reduces your taxable income in the year you make your contribution. The money grows in your HSA account, tax-deferred. You won’t have to pay taxes on capital gains or dividends while it’s in the account. And finally, you won’t have to pay taxes at all on money you withdraw from your HSA for qualified medical expenses. As a result, you can pay for doctor’s visits, prescription drugs, even contact lenses and glasses, with pre-tax dollars, a significant savings. 

You can keep money in an HSA indefinitely, so if you don’t have a lot of medical expenses in one year, you can use your funds the next year or the year after. However, you can’t make contributions to an HSA if you’re not enrolled in an HSA-eligible insurance plan. Your financial professional can help you make sure that you choose a plan that qualifies. 

Your financial professional can provide guidance regarding your HSA, choosing a mix of liquid assets for current expenditures, as well as investment options for the longer term. That’s important because if you have money left in your HSA when you reach age 65, you can withdraw it for any purpose⁶, medical or not, without owing taxes.

Plan ahead for health costs

Medical expenses can be devastating if you don’t prepare for them, but with a good insurance plan, some savings for uncovered costs and perhaps even an HSA, you’ll be in a good position to meet them. Talk to your financial professional about how to get started.