Are you dismayed at the health insurance premiums that are deducted from your paycheck? Do you feel you’re paying big bucks for health insurance but end up visiting the doctor only a couple times a year? Do you feel your health insurance premium money is better spent on making a mortgage downpayment or investing for the future?

If you answered yes to the above questions, a high-deductible health insurance plan may be right for you. A lot of young adults who are starting out their careers and are in good health benefit from such a plan, while staying protected from the financial risks of serious illness.

If you have a deductible set to $5000, you will have to pay up to $5000 out of your own pocket for medical expenses and thereafter the insurance company will pick up the tab. The savings from such a plan depend on the reduction in your insurance premium.

For example, let’s say you save $50/month in insurance premiums by switching to a high-deductible plan. (You can call your insurance company or check out your benefits website to find what the savings amount is). Assuming your annual rate of return from investments is a very conservative 3% and using discounted cash flow analysis, switching over to high-deductible plan will benefit you by $590 right away. However there are other factors to consider before you plunge in:

1)      The chance that you will fall seriously ill and will have to pay $5000 out of pocket. You would completely lose the benefit of the $590 you save from the high-deductible plan if the probability of falling seriously ill over the next one year is about 12% ($590/$5000). If you think your chances of falling ill are lower, you will benefit from the higher deductible. Remember this is a mathematical concept, so weigh your real-life chances carefully by considering aspects of your health such as body weight, smoking habit, family history etc.

2)      The availability of a health care spending account (HSA) to go along with a high-deductible plan. An HSA lets you save pre-tax dollars in a separate investment account where they grow tax-free. The money in these accounts can be used for medical expenses without incurring any taxes. However there is usually a time limit of 1 year within which the money must be spent on medical expenses or you would lose it.

Critical Illness Insurance is a type of insurance that is very popular in Canada and Europe, and is now beginning to catch on in the US. Critical illness insurance pays you a lump-sum payment (you can decide beforehand what this sum will be) if you get diagnosed with a critical illness such as malignant cancer, cardiac arrest, kidney failure etc. The advantages of critical illness insurance are:
1) You can use the payments for multiple purposes and not just to pay medical bills. For example, you can use it to make mortgage payments while you are in the hospital and have no income.
2) There are few medical questions asked of you before you buy it.
3) If there are changes in your life (job loss, pay cuts etc.), critical illness insurance is normally not affected as long as you pay the premiums.

The two most important factors in considering such insurance:

1) Your medical need

It is difficult if not impossible to predict your chances of getting a critical illness over your lifetime. If you have a family history of an illness, you may want to consider critical insurance that covers its treatment.

2) The coverage you already have through your existing health insurance

This, in my opinion, is the most important factor to consider. Do you have a very high medical deductible (more than 3-4 times your monthly after-tax income)? Then it might help to have the critical illness insurance supplement your regular health insurance. If you are self-employed, you may have only a very basic health plan and could supplement it using critical illness insurance. I would recommend going through your current insurance policy carefully (maybe get on the phone with customer service) to determine exactly what you will get from them, if you’re diagnosed with a critical illness.

Critical illness and disability insurance are often seen as substitutes for each other, and if you are having trouble getting disability insurance because your income is too high or because your profession is high-risk, then it makes sense to look into critical illness insurance. I don’t think critical illness can completely replace disability insurance though, because critical illness only pays for a limited number of illnesses.

Critical illness payouts are based on definite events so I cannot emphasize enough the importance of reading the fine print on the insurance coverage documents. For example, you may think you’re protected in case you are diagnosed with cancer, however it may turn out (and this is usually the case) that critical insurance illness payouts are available ONLY if you have late-stage or life-threatening cancer. If there is an illness you are most concerned about, make sure it is satisfactorily covered. There’s nothing worse than finding out after you’re diagnosed!

If you’re buying critical illness insurance to supplement regular health insurance, you need enough to cover the income you will lose while you undergo treatment. If critical illness insurance will be the only coverage you’ll have when you become seriously ill, then consider the full costs of treatment plus lost income for duration of treatment.