Consumers and business owners frequently inquire about the difference between these plans. Most understand the basics of traditional health insurance, but many do not understand the nuances of a Health Savings Account - or HSA.
What are Health Savings Accounts? The easiest way to explain the difference may be to clarify what health savings accounts are not. They are not health insurance plans. Rather, they operate much like savings accounts setup at a bank. And they are always coupled with a high deductible health insurance plan. That is to say, one could purchase high deductible health insurance coverage with or without a health savings account attached to the plan. A Health Savings Account is exactly that – an account established with a financial institution to save money for future health expenses.
The idea behind HSA's is fairly straightforward. Owners voluntarily deposit funds into their accounts to be used later for qualified health expenses. These dollars can be used for a variety of expenses – including (but not limited to) visits to the doctor, prescriptions and/or meeting the deductible.
Advantages of HSA Compatible Plans Generally, Health Savings Accounts will be less expensive than traditional insurance plans. The reason is simply that plan deductibles are higher. Therefore, the insurance company underwriting the plan will not have to immediately cover small, incidental claims. The owner would use funds from the HSA for many of the incidentals - like doctor visits, prescriptions, etc.
In addition, the attached savings account has significant tax advantages versus traditional health plans. Contributions into an HSA are tax deferred and the interest accumulates tax deferred – much like contributions to an IRA. However, when funds are withdrawn for qualified medical expenses, no taxes are due on those withdrawals. In this way, HSA's provide tax advantages to the consumer twice – once when the money is deposited and again when it is withdrawn. (Individual and family contributions are limited to $2,850 and $5,605 respectively in 2007.)
Who Should Consider a HSA Compatible Plan? Healthy individuals who infrequently visit the doctor are good candidates. Individuals and families on a tight budget, but in need of affordable coverage could also consider a HSA plan. These consumers can pay smaller, minor health costs out of the HSA, but should they have a significant claim, the health insurance coupled with the plan is available once the deductible has been met.
Many employer sponsored group plans are already switching to HSA's to lower their health care premium bills. The rising cost of health care is forcing many companies and small business groups to change insurance plans in order to save money. A HSA compatible plan can be a fair compromise for the employee and the employer. Some employer groups will make contributions to the HSA to encourage employees to make the change.
Who Should Consider Traditional Insurance? Consumers who want lower deductibles and more in immediate benefits tend to purchase traditional plans. In the insurance industry, this concept is called "first dollar benefit". These are benefits the consumer receives without having to meet a deductible or co-insurance provisions. Examples of first dollar benefits include annual physicals, visits to a specialist or non-specialist, OBGYN visits and prescription coverage. While newer HSA plans are offering more in first dollar benefits, usually traditional health insurance will provide the most in immediate benefits.
Traditional coverage can be more advantageous for families and/or middle aged or older consumers. These groups may be more likely to have several claims against their policies. They may desire more in immediate benefits. Additionally, they may simply have the resources available to afford more expensive policies.
In summary, there are many health insurance plans available to the individual, family and business group. Choosing the right plan will often times involve balancing cost with benefits. HSA compatible plans can be an affordable alternative to a traditional, lower deductible plan. Consumers, when working with an experienced independent agent, can usually find a suitable plan that fits their needs.
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