I recently wrote a piece about the trend of adults expressing desires that their high school math teachers should have taught them valuable life lessons. I tried to fix this and it turns out that now that you’re not in my classroom you actually want me to teach you something.
Better late than never, I guess, but please at some point can we return to how cool math can be?
If you’re a younger Millenial or a Gen Z who is about to enter the workforce, you’ve been existing in one of three buckets: knowing what’s happening in HR presentations about health insurance, pretending to know what’s happening in HR presentations or you’ve never sat in on an HR presentation. You probably want a better idea of what’s happening so I will try to give you a solid foundation.
Up until the age of 30, the only thing I knew about health insurance was that it was the barometer for if the job was good or not. Coming out of college people would say things like, “I got a job with full insurance and benefits.” Everyone would respond with, “Wow. Yes. V Adult. That’s so good. You can get off your parents plan now.”
Somehow, getting out from under the parent’s thumb seems so punk rock.
But let’s back it up for a second. Not everyone is on their parent’s plan. Some people have no idea what their health care options were as children. Maybe you were on CHIP or maybe your parents were bought in through the Affordable Care Act (ACA). Maybe the school nurse was your doctor. But I hope now that you have the ability to provide your own insurance and it’s OK if you’re confused. Let’s cover some basics.
Getting off your parents plan
Ok so you graduated and got a job. You were paid a good salary. You got a 1-bedroom apartment in the coolest part of town. You didn’t need to crash with your parents for a bit or sell a bike for $100 on Craigslist that you bought for $20 earlier that day at Goodwill (I did this only once.) And you definitely don’t need to stay on your parent’s plan.
Because of ACA, it was recognized that very few young people have the aforementioned experience in an excellent gig right away. You can stay on your parent’s plan until you are 26. You can stay on their plan even if you have a job that provides insurance. For the sake of this article let’s say you have a job that offers health insurance but you don’t want to look like a total rookie when comparing plans. I can’t tell you what a good plan is but I can equip you with some basic knowledge so that you can ask good questions and figure out your situation.
Insurance is best explained by the following scenario. Let’s say there are ten rural farmers in an area. One of the farmer’s barns burns to the ground after getting struck by lightning. The family only has enough money to rebuild half the barn so they’re screwed. The surrounding farmers decide to chip in and help them out knowing that the local support would do the same for them if any other disaster happened. Then one farmer thinks to themselves, “You know, we could all pitch in $100 a month and then if anything bad happens to any of us, we can just go to that pool of money and know that we’d be taken care of. We could ensure that we’d be OK and we can call it to be insured.” That’s kind of how it works. And in fact, big companies like USAA and Navy Federal got their start this way. Military folks overseas would sometimes have a hard time finding coverage for family members for things like car insurance so a bunch of them got together and said, “we’ll do it on our own!” So punk rock. Insurance is usually applied to individual things like home, car, or health. A lot of the terminology is the same.
When learning about insurance plans you see a few words tossed around like everyone knows them. And no one ever really explains what they are to the person who has never learned about healthcare plans. You just slowly piece together what is good and bad by whatever the older people complain about. “I can’t believe how much our premiums went up.” A premium sounds like a good thing. Like, “wow yes my premium is so prime I’m so good.” But the tone of discussing premiums is usually negative so then you’re all, “So do I want my premium to be low?” The insurance premium is the cost to you each month to have that plan. For the farmers above their monthly premium was $100. Whether a premium is good or bad is subjective. If the product remains the same but gets more expensive, then you’d be annoyed. That’s often what happens that causes people to groan.
“But Plan A has a lower deductible.” I heard this phrase for multiple years and no power of deduction helped me figure out what the hell people were talking about. The deductible is the amount paid out of pocket by you before an insurance provider will fully pay any expenses. So if your deductible goes up that means you have to pay more before you get help. For our farmers above, they could have agreed that the deductible was $500. Your barn partially burns down and it only requires $300 to fix it. The Farmer Insurance group says they’ll make a note of the incident but not help you just yet. For your health insurance this number is usually anywhere from $1500 to $6000. Which leads us to why would you have a low deductible or a high deductible.
Low Deductible Health Care Plans, LDHP, means you don’t have to pay a ton of money before the insurance will fully kick in. Why wouldn’t you default to this? Well typically it costs more money in the range of $50 to $100 more per month (or even more depending on if you’re an individual buying insurance or getting it through your job). So this is the trade off. You are paying $1200 more per year in order to possibly cover yourself in case you need it. If you ended up not really even going to the doctor for a year then you basically overpaid $1200. THIS IS HOW INSURANCE COMPANIES MAKE MONEY. They want you to buy more than what you need and then cover you for as little as possible. LDHP come with a copay which means that when you go see a doctor there is a predetermined amount that you pay. There is little guesswork and it’s convenient.
High Deductible Health Care Plans, HDHP, means you have to pay a lot more money for healthcare before insurance fully kicks in. Why would you want to pay a lot more money? Two reasons: you are healthy and you want tax savings. If you are healthy that might mean you don’t have regularly scheduled doctor’s appointments, prescriptions, etc. So if you may not need insurance an HDHP can save you money. The more interesting reason to get an HDHP is the tax savings. Let’s say you can afford the higher monthly payment of the low deductible plan but you are healthy and want the low deductible plan. The extra $100 per month that you would have paid for the low deductible can be put in a health savings accounts (HSA). Your HSA is literally a savings account that you can draw money from for any health related expense. Often companies will put money into this account for you. So not only can you put the $100 a month into the HSA to cover any expenses, it’s also done pre-tax.
Quick lesson on pre-tax. First refer back to my previous article where I discuss tax brackets. Now for this example, let’s say that you are on the cusp of the 22% and 24% brackets. You make $86,000 per year which puts you $475 into the 24% tax bracket. That means of the $475, the government takes 24% or $114 and you’re left with $361. Now let’s say that you put that $475 into your HSA. You aren’t taxed on it. You get to keep all $475 and put it towards healthcare. And because it’s a savings account you can earn interest and continue to put money away for the rest of your life.
This next section is kind of advanced but where the long term impacts really mean something.
HSA vs 401K. When you put money into a 401k or an IRA, you get the tax deduction in the short term but you then pay taxes on it later in life when you do a withdrawal. So either you’re taxed now or taxed later. But with an HSA you are never taxed when the money is used for healthcare. Show me a person that doesn’t spend incrementally more money on healthcare as they age.
There is of course way more to this and it’s worth speaking to your HR representative to cover your unique situation and what’s best for you. Talk to a financial planner to figure out what to do with expendable income. Take these explanations as your starting point for making decisions about the rest of your life. Because after all, I’m not an expert. I was your math teacher.