Health insurance is the most complicated household policy and the most consequential. Understanding the four components — premium, deductible, coinsurance, out-of-pocket maximum — is the working literacy required to compare plans and to use one well.
- 01Define premium, deductible, coinsurance, and out-of-pocket maximum.
- 02Compare a high-deductible health plan to a traditional PPO honestly.
- 03Use an HSA effectively where the plan permits one.
The four numbers
Premium: what you pay every month to hold the policy. Deductible: what you pay before the plan starts sharing costs. Coinsurance: your share of costs after the deductible, typically 20%. Out-of-pocket maximum: the annual cap beyond which the plan pays 100%.
HDHP versus PPO
A high-deductible health plan has a higher deductible and a lower premium, and pairs with an HSA. A traditional PPO has a lower deductible and a higher premium. For healthy households with sufficient savings to absorb the deductible, the HDHP-plus-HSA combination is often the lower total cost.
The HSA
A Health Savings Account is the most tax-advantaged account in the American system: contributions deductible, growth tax-free, withdrawals tax-free for medical expenses. Households eligible for an HSA should max the contribution every year and, ideally, invest the balance and pay current medical expenses from cash flow — using the HSA as a retirement vehicle.
- Four numbers. Read them before enrolling.
- HDHP + HSA is a powerful combination for the eligible.
- The HSA is the most tax-advantaged account in the code.