When to Pay a Higher Health Insurance Deductible

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Choosing a health insurance plan with a higher deductible can make your premiums more affordable.

What's the first thing people do when they want to save money on their car insurance? They raise their deductible. The higher your deductible, the lower your premiums will be, because the insurance company gives you a sizable discount for paying small amounts yourself. The deductible is the amount you have to pay out of pocket before the insurance kicks in.

I learned about high deductibles as they apply to medical coverage when I started my first on-air television news job at age 23. I was a freelancer and didn't have health insurance. I was also making just $21,000 a year and didn't think I could afford healthcare coverage.

I called my dear old Dad to ask for advice and his wise words have never left me. He pointed out that insurance is not for routine stuff. Rather, it's meant to protect you and your family from catastrophic financial loss. My Dad suggested I skip all the fancy plans that paid for lots of preventive care and instead choose an inexpensive one with a high deductible that would give me excellent protection if something awful happened, like a car accident or a major disease diagnosis. Sure enough, once I looked at plans with high deductibles, I could easily afford the premiums.

Most families can muddle through even $10,000 worth of medical expenses, if that's the size of their deductible. It's not pretty, but it's possible. But the $250,000 bill from the family member who has a heart attack and needs critical care can bankrupt you. How do you recover from that? These days there are dozens of "mini-med" plans out there that offer next to no benefit if you have a major illness. That's why the best way to save on health insurance is to pick a plan that has a high deductible but offers generous coverage once you meet that deductible.

Before I continue my argument, keep in mind, a high deductible is not for everybody. Raising your deductible works best for younger, healthier people who don't need much medical care. However, anybody who takes good care of themselves or makes a comfortable living should consider it. A high deductible worked for me when I was 23 and even works now that I'm in my 40s because I am blessed with good health.

If, however, you have a chronic medical condition that requires continuous care, or you live financially close to the edge, this advice is not for you. For people with chronic illnesses, an employer-based plan with a low deductible and generous benefits is best. If you have a low income and a high deductible would ruin you financially, you may be better off in an HMO plan with no unexpected costs.

To show you how you can SAVE BIG by raising your deductible, let me give you an example. I just spent a couple of hours analyzing health insurance choices for my friend Stephanie. Stephanie is a healthy 41-year-old woman. I found five plans for her, all with one company, where every aspect of the coverage is the same except for the deductible. This makes for a nice clean comparison. Check it out:

Possible Health Plans for Stephanie

Deductible Premium
$500 $4,236/year
$1,500 $2,808/year
$2,500 $2,352/year
$5,000 $1,536/year
$10,000 $1,164/year

Yes, it would be nice for Stephanie to have health insurance that kicked in after just $500, but she would pay dearly for the privilege - $4,236 a year! Imagine how many doctor visits that money would cover if she paid cash. Actually, I'll tell you, about 34 15-minute appointments at $125 each! Now let's consider the $1,500 Deductible. If Stephanie chooses the $1,500 deductible instead of the $500 one she can save 33-percent. It's a sure savings of $1,428 a year in exchange for a possible cost of $1,000. She could set the $1,428 aside and use it to cover the $1,000 difference, and still have money left over.

For that reason, the $1,500 plan will probably make sense to a lot of people. For people who are comfortable financially, I'd suggest going with an even higher deductible. It's up to you how far you are willing to take this concept, depending on your situation. If you analyze the even higher deductibles, you will see that there are benefits at every price point. It's an individual choice based on your unique situation.