Health insurance pays for medical, surgical, and pharmacy expenses, and sometimes dental expenses, for individuals and covered family members. Most Americans receive health insurance through employer-sponsored benefits packages, with a portion of the premiums deducted from paychecks. Health insurance premiums are tax-deductible for employers, and the benefits are provided to employees tax-free. Health insurance can also be obtained on an individual basis and may be tax-deductible for the policyowner.

Health insurance requires premium payments, and most plans also charge deductibles, copays, and coinsurance. The trade-off between how much you will pay in premiums and how much you will pay out of pocket when care is needed should be understood when choosing a plan based on how much care a person thinks they will need. A frequent healthcare user would be better off paying higher premiums and lower out-of-pocket costs, whereas someone young and healthy would be better off paying lower premiums and higher out-of-pocket costs.

Health insurance is available in many forms, such as managed care plans, also known as HMOs or PPOs, that require policyholders to receive care “in-network” from designated healthcare providers. If patients seek care “outside of network”, they must pay a higher percentage of the cost or could even be denied coverage. Plans for lower-income individuals can be accessed through the Affordable Care Act (ACA), and short-term coverage can be obtained for people who need to bridge a short period, such as transitioning from college to employment or while waiting to turn 65 and enroll in Medicare.

A common form of health coverage today is a “High Deductible” plan combined with a Health Savings Account (HSA). An HSA is a tax-advantaged bank account funded by pre-tax wage contributions to help pay for qualified medical expenses. Contributions made to an HSA do not have to be used or withdrawn during the tax year, and any unused contributions can be rolled over to the following year. HSAs are funded with pre-tax dollars, contributions are 100% tax-deductible, and any amounts used to pay for qualified medical expenses are tax-free.

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