Dave Ramsey, author of "Total Money Makeover," says that self insurance is the best insurance. By having cash reserves to cover emergencies, you can avoid paying premiums and accumulate interest during the good times. Major medical expenses can run to such high totals that self-insurance isn't a reasonable option even for the relatively well off. A high deductible major medical policy can be a good compromise.
Major Medical Insurance
Medical insurance pays a portion of medical bills, helping to make medical care more affordable for the policyholder. Some policies, most notably health maintenance organization plans, focus on paying all but the smallest amount of every procedure. Major medical plans reverse that model, paying for the excess expense of high priced procedures but covering none of the costs of routine visits and other inexpensive medical treatment.
Deductibles
An insurance deductible is an amount of money the insured is expected to pay before the insurance pays out. For example, a policy with a $250 deductible would pay $750 of a $1,000 procedure and none of a $500 procedure. High deductible policies have deductibles in the thousands of dollars, meaning they pay for only the most expensive medical treatment. In exchange, the higher the deductible on a policy, the lower the premium payments.
Limits
When looking at major medical policies, it's important to consider three policy limits. Maximum annual out-of-pocket limits put a cap on how much you will pay in deductibles over a year. For example, a policy with a $2,000 deductible and a $10,000 annual limit would mean you pay nothing after you've spent $10,000, even if a deductible would otherwise apply. Some policies also carry per incident and lifetime benefit maximums, which put the burden back on the policyholder if medical expenses should exceed either limit. Note that the 2010 Health Care Reform Act put an end to lifetime maximums on health insurance policies.
Health Savings Accounts
One popular strategy is to combine a high deductible major medical policy with a health savings account. Health savings accounts allow you to save money earmarked for medical expenses as pre-tax dollars. You can use the account at any time, tax free, provided you can demonstrate it was used for medical bills. Dave Ramsey recommends combining a high deductible policy with an HSA with a balance equal to your annual out-of-pocket limit. Health savings accounts are also labeled flexible spending accounts and medical savings accounts.
Appropriateness
High deductible major medical policies are most appropriate for people with the financial resources to pay the deductible out-of-pocket. For individuals and families for whom a sudden, $1,000 medical expense would be a hardship, low deductible policies are generally the better choice.
References
- "Exam Cram: Life and Health"; BiSys Education; 2008
- "Total Money Makeover"; Dave Ramsey; 2008
- Courtney Rogers, Insurance Executive, American Income Life, Richmond, VA
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