While we can’t predict how much we’ll need for future healthcare expenses, we can certainly prepare for the unexpected. Beyond primary medical insurance, there are several other avenues to help you manage healthcare costs, today and tomorrow.
A flexible spending account (FSA) lets you set money aside, tax-free, for your out-of-pocket medical, dental, and vision expenses or dependent care costs. FSAs aren’t for everyone, so it’s important to understand the pros and cons.
Pros: If you anticipate high medical expenses in the next year or you care for a dependent, an FSA may be a good option.1
- Tax Savings: Since you contribute to your FSA through payroll deductions, the money is taken out before taxes. This reduces your taxable income, which means you’ll owe less to the IRS.
- Medical Savings: FSAs can help pay for healthcare costs outside the typical scope, like over-the-counter prescriptions, travel vaccines, and diagnostic tests.
- Family Healthcare Coverage: You’re not the only one who can take advantage of your FSA. Your spouse, dependent(s), and adult children through age 26 can use it too.
- Immediate Availability of Funds: While your chosen FSA contribution is taken out gradually with each paycheck, the full pledged amount is available to you immediately.
Cons: Certain FSA requirements and rules could present some drawbacks that may influence your decision.1
- Limitations: Employees are limited to a maximum annual contribution of $2,750 in 2020.2
- Expiration: Also known as “use it or lose it,” you must use the money in your FSA within the plan year. There are rare exceptions, so check with your employer to clarify.
- No Job, No Benefits: FSAs are tied to your employer, so if you leave your job, you leave your benefits.
- Limited Enrollment Period: You must sign up for an FSA during your employer’s open enrollment period. Missing the deadline means you’re out of luck until next year in most cases.
- You Can’t Alter Your Contribution Amount: Unless you experience a qualifying event (marriage, birth, adoption), the contribution you choose at the beginning of the year cannot be changed until next year.
A health savings account (HSA) combines a high deductible health plan (HDHP) with a built-in savings account. This money can be used to pay down your deductible and medical expenses, including some not covered by primary health insurance, like dental and vision care.
To be eligible, you need to meet these requirements:3
- You’re currently covered under a HDHP since the first day of the month
- You have no other health coverage, except what’s permitted by the IRS
- You aren’t enrolled in Medicare
- You can’t be claimed as a dependent on someone else's current year's tax return
Here’s how an HSA works: Workers determine an amount of money to have pulled from their paycheck each pay period and deposited into their savings account, kind of like a 401(K).
The money you put into your HSA is triple-tax advantaged.4
- Contributions are not included in your taxable income
- Withdrawals to pay for qualified medical expenses, including dental and vision, are never taxed
- Interest earnings grow tax-deferred, and if used to pay qualified medical expenses, are tax-free
Best yet, unlike a flexible spending account (FSA), the money left in your account at the end of the year isn’t forfeited. You keep it, and it continues to grow tax-deferred.
There are limitations on how much you can contribute to your HSA each year. For 2020, limits are set at $3,550 for individuals and $7,100 for families.5
Term Life Insurance with a Living Benefit
People buy life insurance to help protect their loved ones if the unthinkable were to happen. But what if you suffer a major health event like a heart attack or stroke, and survive? The hospitalization, treatment, and rehabilitation costs could be staggering.
Certain life insurance products offer a living benefit just for this purpose. The idea is simple: You can accelerate your death benefit to help pay for a qualifying condition in the case of an emergency.* Be sure to check with your employer to see what is offered.
1 “Pros and Cons of Flexible Spending Accounts”, GO Banking Rates, 2017
2 "IRS Provides Tax Inflation Adjustments for Tax Year 2020," IRS.gov, November 2019
3 "Publication 969 (2018), Health Savings Accounts and Other Tax-Favored Health Plans," IRS.gov, March 2019
4 "What is an HSA?", HSA Center 2017
5 "2020 HSA Limits Rise Modestly, IRS Says," SHRM.org, May 2019
*Benefits provided through the Living Benefits, including the critical, chronic, and terminal illness accelerated death benefits, are subject to certain limitations and exclusions. Amounts payable under the benefits vary based in part on the nature and severity of the Insured’s health condition and the Insured’s remaining life expectancy at the time of the acceleration as determined by the company. Refer to the policy contract for complete details.