Insurance -- of all kinds -- is characterized by low premiums and high deductibles with regard to the payout that the insurance policy underwriter will arrange. But we all know that the typical health insurance policy isn’t characterized by this at all. There may be co-pay options or no deductible at all, but almost everything you might see the doctor for is covered if you spend enough money in premiums. And speaking of health insurance premiums, they’re anything but low!
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But in 2004, federal insurance regulations allowed for the creation of what is known to many as “catastrophic insurance coverage”. Traditionally, insurance policies aren’t supposed to cover a wide range of costs. They are supposed to be low-cost hedges against what will be detrimental or even bankrupting events financially if there were no insurance protection. Catastrophic health insurance is limited, compared to the traditional (and ironically uncharacteristic) health insurance plans in the United States, in what events it will pay out for. And, it comes with a high deductible.
So what’s the trade-off? You guessed it: low(er) premiums!
Features and Benefits of Catastrophic Health Insurance Policies
● Premiums are low (in comparison to other health insurance plans)
● Dependent upon the policy you choose, the policy choices offered by the underwriter, and state regulations, there are limited events and conditions that your catastrophic health care plans will pay out for.
● Qualified preventive care is covered, and you don’t need to pay a deductible for that.
● There is a high deductible, which may be thousands of dollars annually. The deductible is the amount of your own money that you must spend before the health insurance policy begins paying for you.
● If and when the annual maximum deductible is paid out of pocket by you, the insurance provider begins paying 100% of your medical bills (for anything covered in your particular policy). Some plans require a “tiered” approach to this so that the policy starts paying, for example, 80% of your medical bills up to a certain amount of total expenditures, after which point the insurance covers 100% of your medical expenses.
● Many catastrophic health insurance policies qualify to come with an MSA or HSA (medical/health savings account) which you can choose to include in the policy.
What Is an MSA or HSA?
The MSA or HSA is a tax-sheltered, interest-bearing savings account into which you can readily put money up to a federally set maximum annual amount. You don’t pay any taxes on the accrued interest returns and you can write off the amount you give from your federal income taxes. If you withdraw the money to pay for medical expenses, you also don’t have to pay any income taxes on what you withdraw.
Any money that you don’t withdraw to pay for medical bills with residue in the account and proceed to accrue tax-free interest. Some insurance companies offer full-blown mutual fund accounts within their HSAs or MSAs so that you can try to achieve higher returns than you would be with the regular savings or NOW account. After you turn 65, you can withdraw the money for any purpose and pay only income taxes on the amount that you withdraw in a given year. If you take money out for non-medical reasons prior to age 65, you must pay income taxes plus an additional 20% “premature withdrawal” tax.
Who Stands to Benefit from Catastrophic Health Insurance Policies?
Anyone who is young (under age 50) and healthy shouldn’t hesitate to check out catastrophic health insurance policies. They are fantastic for the majority of middle-aged and elderly people, too, but such individuals may also need to consider having a supplemental plan to cover the cost of prescription medications. (Some younger people who are strong but still have a need for specific prescription pharmaceuticals should also take this into consideration.)
Very young people (age 34 and under) will benefit the most, from getting the lowest possible premiums to having the potential to build up the biggest HSA/MSA account for their later years of life.
How Should You Proceed with Getting a Catastrophic Health Insurance Policy?
● Compare different plans and different providers patiently and with utmost care, and ensure that you know exactly what will and what won’t be covered with your top choices of policies.
● Never buy a policy that does not qualify to cover the HSA/MSA, as this is one of the major advantages of having such a health insurance policy.
● Fund the interest-bearing account to the maximum every year.
● Take the amount of your potential annual deductible and invest it or otherwise set it aside in an interest-bearing account. (Your ceiling for the amount that you can put into your HSA/MSA may be lower than your annual deductible limit, so you may want to have a separate additional account such as an index mutual fund to make up the difference.)
About the Author-
Frank Roberts is associated with Swope, Rodante P.A., a Tampa law firm that specializes in traumatic brain injury, insurance bad faith, catastrophic injury and many more such cases.