- To prevent unexpected medical expenses from derailing your finances, start by assessing whether or not you have your yearly out-of-pocket maximum saved.
- Also, remember to look at the details of your health plan to see what benefits it covers.
- If you have a high-deductible health plan, you can roll health savings account (HSA) savings into the next year—and, in fact, keep contributing to your HSA and letting it grow until you retire.
If you have to declare bankruptcy, research shows that it will likely be for one main reason: medical bills. For 67% of all bankruptcies, medical issues played a role, according to a November 2018 study.1 Half of a million families each year are forced to declare bankruptcy because of medical bills or issues arising from illness. Before you say “Not me!” consider this: The majority of families that fall into debt because of medical bills and subsequently declare bankruptcy are middle class.
Middle-class consumers are looking at higher and higher co-payments and deductibles, and their health insurance plans don’t always provide the coverage they think they’re getting. Not only that, several studies have pointed to the fact that many Americans don’t even have money saved to cover an unexpected expense, even a relatively small one. In fact, four in 10 adults would have to borrow money, sell something or simply not be able to pay for a $400 emergency expense.2
“Anyone can be hit with unexpected medical expenses, and it can really throw off all of your financial plans if you’re not prepared,” says Ainsley Carbone, Total Wealth Strategist with UBS. “This can happen in the years before retirement, or during retirement.” Even families who are financially stable can be deeply affected—especially if an illness suddenly prevents a high-income earner from working. Not only does the family lose the income, they also lose the health insurance benefits.
Carbone has a few suggestions to prevent unexpected medical expenses from hijacking your finances.
Save your out-of-pocket maximum
It’s easy to adopt a mindset that you are one of the “healthy people,” and sickness or injury only happens to “other people.” “We encourage people to look at what could go wrong,” Carbone says. It’s not about being a pessimist, but rather about being prepared.
Start by assessing whether or not you have your yearly out-of-pocket maximum saved. For a family, the out-of-pocket maximum for 2019 for a Marketplace plan is $15,800.3 This is the most you would have to pay on covered services (including paying your deductible). Make saving this amount of money your first goal.
Know what your health insurance plan covers
The caveat for the out-of-pocket maximum is that it only applies to covered services. “It’s important to look at the details of your health plan, to see what benefits it covers,” Carbone explains. Many Americans have only a vague idea of what types of services are covered by their health plans, especially when it comes to serious illnesses. Don’t rely on something before you know the facts about it. Also, find out if your company offers any type of disability, and what qualifies as a disability.
Maximize your HSA
One of the best strategies for preventing disaster when it comes to medical bills is to save money. This is where a Health Savings Account (HSA) comes in handy. This type of account is open to anyone who has a high-deductible health plan. HSAs are often underrated and under-utilized, and few people take full advantage of their benefits.
“HSAs have a triple tax benefit,” Carbone says. Not only do you make pre-tax contributions, similar to a Traditional IRA or 401(k), your investment earnings also grow tax free. Plus, your qualified distributions are tax free, so you never pay tax on the money.
People often have the mindset of using their HSA only for the current year, but unlike a Flexible Spending Account (FSA), you can roll an HSA into the next year—and, in fact, keep contributing to your HSA and letting it grow until you retire. “Think about it not just for near-term spending, but for long term. We encourage people to contribute the maximum every year to their HSA, and to try not to take from it,” Carbone says. You can also invest the assets in your HSA, though only a very small percentage of people do. More should take advantage of this, Carbone continues. She recommends keeping the amount of your deductible in cash, and investing the rest of the assets.
Although you can’t use your HSA to pay health insurance premiums, you can use it to pay the cost of COBRA—the health insurance you can opt to take if you lose your job and your health coverage. You can also use your HSA to pay for the cost of long-term care.
One illness can do a lot of financial damage. Knowledge, preparedness and a healthy HSA just may be your best defense.
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