HSA: The "Two Insurance Companies" Concept.™

How an HSA Insurance Plan Works


The best way to think about a health savings account plan is to envision TWO insurance companies working in conjunction to insure your healthcare. You own the smaller insurance company which primarily is funded by contributions to your health savings account - this is a form of self-insurance but you only are on the hook for the smaller, routine medical expenses. You purchase an insurance policy from a reputable, highly rated insurer to cover larger, unanticipated medical expenses, subject to a high deductible (this plan design must comply with IRS Rules).

Self-insurance - for smaller, routine expenses. Because you are responsible for routine medical bills under the deductible amount, you effectively act as the insurance company for the smaller expenses. Stated differently, you are self-insuring the routine medical expenses. Contributions to your HSA savings account serve as "premiums" you pay to yourself to fund your self-insurance program, and the Government gives you a substantial tax-break for doing this. Just like an IRA account, every dollar you contribute to your HSA savings account is 100% tax-deductible. And just like an IRA, all funds in the account always are yours to keep - what you don't use to pay medical bills each year "rolls over" from year to year and actually goes to supplement your retirement at age 65.

Traditional insurance - for the "big stuff." A traditional insurance company assumes the risk of expenses above and beyond a "high" deductible you select. You pay premiums to the insurance company to assume the larger risks over the deductible amount you choose. The larger the deductible, the lower these premiums will be. Just like with any other insurance policy you own, your premiums are paid direct to the insurance company - they are not related to your HSA savings account in any way. If you are self-employed, premiums may be tax-deductible.

Comment: Coming in '12 for Kathee and me.

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