If you're enrolling in your employer's health insurance plan for the first time or updating your existing coverage, it pays to be prepared. You might wonder if it makes more sense to go with a high or low deductible health insurance plan.
Like most benefits-related questions, there is no one-size-fits-all answer to that question—it just depends on your individual needs.
What is a deductible in health insurance?
A health insurance deductibleOpen in new tab is the amount of money you must pay toward medical expenses each year before your health insurance plan begins to cover eligible costs. For instance, if your annual deductible is $1,800, you have to pay that much toward your medical care for the year before your health insurance covers costs.
Your deductible is just one factor in how much you’ll pay for your health care. You’re also responsible for your premium, which is the monthly cost for your health insurance. You must pay your premium even if you don’t have any medical expenses.
The size of your monthly premium impacts your deductible—typically, the lower the premium, the higher the deductible. Why does having a higher deductible lower your insurance premiums? Because you’d be taking on more costs if you actually need care, rather than paying more each month toward potential care.
When considering high deductible vs. low deductible health insurance, also look at your out-of-pocket maximum. This number reveals the total amount of medical expenses you may pay each year. It doesn’t count your premium payments, but it does include fees like copays and coinsurance.
What is a high-deductible health plan?
As the name suggests, a high-deductible health plan (HDHP) carries a higher deductible, which must be met before your plan benefits kick in for anything beyond in-network preventive care services. A high-deductible plan is any plan that has a deductible of$1,600 or morePDF opens in new tabfor individual coverage and $3,200 or more for family coverage in 2024.
Compared to a traditional health insurance plan, a high-deductible health plan comes with a higher deductible and lower premium. You pay less each month, but you’re responsible for a greater portion of out-of-pocket health care costs when and if they occur.
High-deductible plans also typically have higher out-of-pocket maximum limits, but once you reach that limit each year (including what you pay for your deductible, copayments, and coinsurance), the insurance pays 100% of the allowable amount for the rest of the calendar year. In 2024, the annual out-of-pocket totalOpen in new tab can't exceed $9,450 for individual plans and $18,900 for family plans, excluding out-of-network services.
Here’s an example of how an HDHP works. Say you pay $450 each month for your premium and your annual deductible is $2,500. In the first month of the year, you get a bad cold and visit the doctor. You’re responsible for the full cost of the visit, which comes to $200. A few months later, you sprain your ankle and head to the emergency room. That visit totals $1,400 in care. You must pay that as well since your total health care costs only amount to $1,600. You must pay another $900 in medical expenses before your plan starts to cover costs.
Is a high-deductible plan good?
While you'll pay more for your deductible with one of these plans, you do get the benefit of a lower premium. That's a plus if you stay healthy and never need to meet your deductible or the maximum out-of-pocket limit. Additionally, many HDHPs cover some preventative care, such as annual physicals, immunizations, and screenings. If you’re on a family plan, your coverage may also cover well-child visits each year.
The other big advantage of high-deductible insurance is that qualified plans offer a health savings account (HSA) to help manage health care costs. Contributing to an HSA for eligible health expenses can also help lower your tax bill.
What is a health savings account?
Ahealth savings account (HSA),is a tax-advantaged account you can use to save for qualified medical expenses, including:
- Weight-loss programs
- Eye exams and eyeglasses
- Dental treatments
- Hearing aids
- Nursing homes and long-term care
These accounts, which are offered alongside high-deductible health care plans, come with some great tax incentives to encourage you to save. Contributions are tax deductible, which lowers your taxable income for the year. Any interest you earn on the account also grows tax-free. And when you use funds for eligible medical expenses, those withdrawals are also tax-free.
Another benefit is that unlike flexible spending accounts (FSAs),health savings accountsaren't “use it or lose it.” You can leave the money in your account until you need it for eligible medical expenses. Beginning at age 65, you can withdraw money from an HSA for any reason with no tax penalty. You'll just pay ordinary income tax on the withdrawal, making it a potential source of backup income in retirement if you stay in good health.
There's one more thing you need to know about HSAs: Not every high-deductible plan offers them. If you're in doubt, check with your plan administrator to see if it's an option.
What is a low-deductible plan?
Low-deductible health insurance plans carry a smaller deductible compared to a high-deductible health plan. That means that when you get sick, you pay less money upfront before your plan kicks in. The trade-off with a low-deductible plan is that you pay a higher monthly premium.
An obvious downside to a low deductible plan is that if you don't end up needing more extensive medical care, you'll have paid a higher monthly premium for nothing. The silver lining, however, is that low-deductible plans make managing and predicting health care expenses easier if you develop a serious illness, are injured, or need surgery. There's no large out-of-pocket expense to worry about since the deductible is lower.
Even so, sacrificing a lower monthly premium to get a lower deductible also means giving up something else: a health savings account. Remember, this tax-advantaged account is only available if you meet the thresholds assigned to high-deductible plans: $1,600 for individuals and $3,200 for families.
Why does having a higher deductible lower your insurance premiums?
Premiums and deductibles balance one another out. A low premium means a higher deductible and vice versa. Both the insured individual and the policy provider must take on some level of risk. Choosing one plan type over another lets you decide where you have the potential to save the most money.
In addition to weighing your health risks, you can also think about your own budgeting preferences. You may prefer to prioritize a low monthly budget, in which case a higher deductible would be helpful in order to keep your premium payments down each month. Then you can decide to save up and keep some or all of your deductible amount in a health savings account to use when you need it.
Alternatively, you may prefer to pay a little more each month in exchange for a lower premium in case a major expense pops up. It’s important to weigh your personal scenario and the individuals on your health care plan before making a decision.
High deductible vs. low deductible: What’s right for me?
Is a higher or lower deductible better? Choosing the right health insurance plan really depends on your personal situation.
If you're young and healthy, you may be less likely to need anything more than preventive care, in which case a high-deductible plan could be the better fit. On the other hand, a lower deductible may be more appealing if you're older, have a chronic health condition, participate in high-risk sports or activities, are pregnant or plan to have a child at some point, or you need pricey prescriptions for a health issue.
A high-deductible plan also helps to assess your savings and budget. Consider how easily you'd be able to meet a higher deductible if necessary. And if you have access to an HSA with a high-deductible plan as anemployee benefit, ask yourself how much you'd be able to contribute each year. (Note: Similar to other tax-advantaged accounts, HSAs have annual contribution limits: for 2024, $4,150 for individuals with self-only coverage and $8,300 for those with family coverage.)
With a low-deductible plan, think about how much you can afford to pay for the monthly premium. Weigh that against the value of having health care services covered when you need them without having to hand over a significant amount for the deductible.
Review your health history to determine whether you'll need more than just preventive care for the upcoming year. Most importantly, reach out to your employer or health plan administrator to get answers to any questions you might have about the plans being offered. If you don’t have health insurance through your employer, you may want to consider buyingindividual health insurance from the Healthcare Marketplace during open enrollment. By comparing options, you’ll make sure you have the level of coverage that makes you feel comfortable.
Author Details
Lauren Ward is a Richmond, Virginia-based writer who has covered personal finance and financial services topics for over 10 years.
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