Your 26th birthday doesn’t just come with the panic of getting closer to the Big 3-0. It also means you have to get off your parents’ health insurance plan and worry about finding your own way in the expensive and complex world of health care.
Young people are finding themselves in health-care limbo as the powers that be in Washington continue to wrestle with repeal and replace attempts of the Affordable Care Act. All this uncertainty has young people wondering about how to plan for their future.
All young people can do is base their options on what the current health-care rules are today, said Carolyn McClanahan, both a certified financial planner and an M.D.
“The number one thing young people need to do is continue to scream at the politicians to get some good health legislative policy in place,” said McClanahan, founder and director of financial planning at Life Planning Partners.
They need to call their senators and representatives and tell them to focus on fixing the cost and the complexity of the health-care system, not how we pay for it, she said.
By addressing the inefficiencies of the system, the cost of care and insurance will be reduced, she added. Also ask them to create a simple-to-use system, get rid of fees for service billing and develop a straightforward national electronic medical record built around great patient care, not billing.
Young people should also be more conservative with their budgeting, said Gabriel Anderson, CFP and founder of Crafted Wealth Management.
“Hopefully the health-care costs won’t change too much,” Anderson said. “But leaving extra wiggle room in your budget for health-care costs is a good idea.”
For now, the options for young people depend on their employment situation and their income, said McClanahan at Life Planning Partners. If you’re employed, get employer-based medical coverage. If you’re unemployed or your job doesn’t offer benefits and you make under 400 percent of the federal poverty level (FPL), you can qualify for tax credits through the ACA, she said.
The bill sets 400 percent of the FPL as the dividing line between those who will and will not qualify for a subsidy. (Four-hundred percent FPL for an individual means income less than $48,240 per year). If you make more than that, you don’t qualify for subsidies and you should contact an independent insurance agent in your state to review your options.
However, McClanahan has a warning for parents. Before you send your children to meet with an insurance agent on their own, make sure they know the nuts and bolts of health care, she advises. They must understand what deductibles, co-pays and out-of-pocket maximums are.
Another option younger clients should consider when they leave their parent’s health plan is a health-care sharing ministry, such as Medi-Share or Christian Healthcare Ministries, CFP Tyler Gray said.
“Although not technically insurance, they operate in much the same way as insurance and can be incredibly cost-effective for young, healthy clients,” said Gray of of SageOak Financial.
A sharing ministry is not for everyone though, he warned, so it’s best to speak with an advisor who’s familiar with these plans to determine if it’s the right fit.
The biggest choice for young people is to decide whether or not it makes sense to use a high-deductible plan with a health savings account or not, said CFP Eric Roberge. HSA premiums are typically lower, but the deductibles are high, scaring many young people away.
“They simply see a huge deductible and want to avoid paying that at all costs,” said Roberge, of Beyond Your Hammock.
“The truth is that many people can benefit from such a plan, as long as they actually sock away the premium savings in case of emergencies,” he added. “Lower premium costs can help you save money if you don’t use the insurance all that often.”
For a healthy, young person who gets an annual physical and not much else, an HSA can be a fantastic opportunity, Roberge said. The trick is to put the premium savings into the HSA. You get a tax deduction for such a contribution, you may be able to invest that money inside the HSA and you can use the money for qualified medical expenses at anytime throughout your life, he explained.
HSAs are the only accounts, including retirement funds, where the money grows tax-free and can be taken out, for medical purposes, tax-free, Roberge added. What’s more, the unspent funds roll over year to year.
For those considering self-employment, Life Planning Partners’ McClanahan advised waiting to make that move until there’s clarity around what Congress is going to do. If you already have good health-insurance coverage, don’t make any changes quite yet.
Some young people are so uncertain about what to do that they consider not getting health-care coverage at all. However, that comes with penalties — and great risks.
Without health care, you get taxed, and sometimes that tax can be almost as much as the coverage cost itself, said Anderson of Crafted Wealth Management. The penalties for not having insurance are $695 or 2.5 percent of your income to a maximum of $13,100 annually, he explained.
Also, you never know when you’re going to have a major accident, added McClanahan at Life Planning Partners.
“My previous occupation was as an emergency room physician … young people tend to think they’re indestructible so they do crazy things,” she said. “Plus, sad things like cancer happen to young people, too.”
If you don’t have good insurance, it’s hard to get good care, McClanahan said.
There’s a common fallacy that emergency rooms have to treat everyone — but that isn’t true. The doctors must see the patients, but they don’t have to treat them.
People aren’t talking enough about the importance of young people taking good care of their health, McClanahan said.
“Too many people burn the candle from both ends when they’re young and they end up having weight issues or they’re smoking, and those don’t bother you when you’re in your 20s, but you really pay a lot on the back end when you hit your 40s and 50s.”