Hospitalization Insurance - Should You Go With Health Insurance Savings Account Or No

With today's prices of health care services, and consequently, with prices of health insurance the way they are, hospitalization insurance only has become a popular choice among the individual consumers. Effectively, high deductible health plans are hospitalization only as, with the deductibles of $10,000 on individual plans, it is not likely that the purchaser will use the plan for anything but an unlikely catastrophic hospitalization event.

High deductible health plans and hospitalization-only insurances have become popular among small and larger businesses as well as they keep down the cost of benefits for employees.

Saving money on monthly premiums and having a large deductible calls for a creation of a savings account that one can use in health emergencies that, however, do not reach the cost of the deductible.

HSA insurance plans pros and cons

The federal law has therefore gone ahead and allowed the creation of "Health Savings Accounts", HSAs, which have an added advantage, namely, that, when coupled with a high deductible health plan, can hold pre-tax monies, and, therefore, the out-of-pocket health expenses can be covered from this pre-tax savings account, saving individuals taxes in the process. The insurance that is eligible to be coupled with a HSA savings account is also called Health Savings Account Insurance. The combination of a HSA health insurance and a HSA health insurance bank account is a win-win situation for the purchaser of an add-on HSA account - if the individual stays healthy, he can accumulate the money in the account and withdraw it after the age of 65 penalty free, or, if needed, use it for health-related expenses, and save on taxes in the process.

But is it really wise to establish a HSA savings account for everyone who purchases a high deductible health insurance? We will present here three arguments why getting a HSA may not be for you, despite the tax advantages. The three reasons against a HSA account are: additional bank fees, limited investment options for the unused monies, and restricted access to the money.

Additional bank fees

Perhaps not surprisingly, you will be hit with several health saings account expenses in form of additional fees if you open a HSA account with a bank that offers them. There will be an account opening fee, the account maintenance fee of $2.50-$10.00 per month, the similar investment account monthly fee, and the account closing fee. There will also be trading and investment fees if you move your funds around. Considering a HSA is meant for a long term, this is a lot of money being drained out of your savings account over time. Furthermore, there are no guarantees that these fees won't increase over time, and you personally clearly won't have much say in that!

Limited investment options for your pre-tax money

Just like with 401(k) accounts, some investment accounts associated with HSA accounts have severely limited investment options. The excuse being that, the money is really intended for health services (really? no, not really), and therefore, it should be parked in low-risk investments such as money market and similar. Since a HSA is a long term savings and investment vehicle, the lack of good investments can wipe out all the tax advantages. If you know how to invest your after tax money at 20% annual interest, you will in a few years beat the HSA savings account investments with their 1-2% return, even though you will start with a smaller amount of after tax money.

Restricted access to your HSA money

By starting a HSA, the issuing bank will give you a variety of options on how to withdraw the funds, either using a debit card, checks or other possibilities. So the withdrawal can be made at any time. The problem with the withdrawal is of the financial nature. With the Affordable Healthcare Act of 2010, since 1/1/2011, the penalty for withdrawal for non-medical uses has been increased from 10% to 20% of the funds withdrawn, if you withdrew before the retirement age of 65.

So, if, in the case of need, you withdraw the funds for a non-medical purpose, in addition to paying federal and state income taxes on these monies, you will pay an additional 20% tax on all of your money withdrawn! And, obviously, there is no guarantee that there won't be a further increase of this penalty in the future.

This penalty will severely restrict your access to the HSA funds.

These are the main drawbacks of the HSA accounts. Of course, the details vary by bank with which you establish such an account.