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What is a high deductible health plan (HDHP)?

Cash from high deductible health plan and pillsThe definition of an HDHP or high deductible health plan is a health insurance plan that has a higher deductible than usual, but lower premiums.

This means you, the insured, pay the initial medical expenses usually set at $2,000 dollars or higher (though it can vary yearly) before the insurance begins to cover more medical expenses.

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This is often times referred to as “catastrophic coverage” since the deductibles are so high the plans are usually only used for emergency medical care and not simple routine care.

Be careful because, if you have a $2,500 deductible you may be required to come up with that cash at a moment’s notice in a medical emergency.

Why would anyone want to pay such high deductibles?

The very low premiums are obviously a motivator. Because of the higher deductibles, and the fact the coverage is usually only used in “catastrophic” cases, the risk is lower for the insurance company. Less risks for them means lower premiums for you, and are therefore much more affordable for the average family that wants to be covered for those “emergency” situations. Catastrophic situations involving children naturally are a major concern to parents.

Why are so many people talking about high deductible health plans?

They are big news because of HSA or health savings accounts (not to be confused with HRAs that are similar but company owned). A health savings account is a medical savings account of which funds are not taxed by the federal government. Instead, all money is saved solely for expenses related to health. Talk about a tax advantage!

Another plus is the fact that the account’s funds add up year after year and are never forfeited just because they are not spent by a designated time period. In an Flexible Savings Account or FSA you must spend the money that year or risk losing it. Having an HDHP is usually required if you want to join in on the tax-advantaged health savings accounts (HSA).

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How do HSAs and HDHPs work together?

The basic plan is that while you pay the lower premiums on your HDHP, you are also putting those savings into your health savings account (income tax free) so that you can afford smaller healthcare costs that may spring up. Saving all that money on taxes will also help you put more money away into your savings for smaller health related things such as basic doctor checkups and prescriptions.

Another item to understand about high deductible health plans is that the money spent on medical procedures and treatments, money that is not covered in the plan, will not count toward the deductible. Be sure that you read all the fine print and have a thorough understanding ahead of time of what is and is not covered.

The high deductible can turn many people away, but a good thing to know is that most HDHPs cover 100% of charges after the deductible is paid. The plan is not for everyone; only you know your individual and family circumstances.

What Plan Should You Choose?

If you are unsure if the plan is right for you, then it may be time to sit down and do a little math. Start by gathering all the health insurance quotes for all the plans you have been considering. Add together the annual costs of premiums and the deductible as well as any other out-of-pocket expenses that may be required for each plan such as medications.

Think worst-case scenario when adding all of these things up, as well as average scenarios based on your current health. Then compare each plan. Remember to look at the “perks” of each plan as well, including tax advantages, and how forfeits are applied by the end of the year if no expenses are incurred.

This is a lot of information to take in all at once, however, don’t feel discouraged. You now have a basic understanding of what a high deductible Health Plan (HDHP) is. You can now make an informed decision on what is right for you and your family. Once you have done the work, you can sit back and relax knowing you and your loved ones will be taken care of when emergencies happen.

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