Welcome back to the second article in a series dedicated to illustrating ways to prioritize saving for specific future milestones and the uncertainties of life. In this post, we will explore Health Savings Accounts (HSAs) and specific types of insurance you should consider. In the first post, we explored prioritizing your Emergency Fund, the 401(k) Company Match, and tackling Credit Card Debt.
Successfully building your wealth can feel energizing, and with that success can come new stresses and complexities.
To help you visualize some potential next steps, let’s walk through a savings priority strategy. This approach prioritizes sequencing contributions to specific financial needs and their related investment accounts.
This strategy utilizes both tax-advantaged and taxable accounts.
While this strategy can be effective and transformative to your personal finances, like all things personal to your finance, you’ll want to understand what it is and how it can be customized for your specific situation. Nothing here is dogma.
Ideally, when you use this strategy, you fully fund each priority before turning your attention to the next priority. So, start with the first priority and when it’s fully funded, move on to Priority 2, then Priority 3, and so on.
Learning Points
While this strategy specifically refers to how to attack debt and invest for retirement, it can incorporate saving for major purchases such as a vacation home, a child’s wedding, or other financial goals. It should be incorporated into your comprehensive financial plan. Depending on your goals and personal situation, the order of these priorities can change.
Let’s dive in to this the two next steps in the savings priority strategy and begin to help you organize what comes next.
Health Savings Account basics
A Health Savings Account, commonly referred to as an HSA, is a personal savings account that individuals can use to pay for qualifying medical expenses. Health Savings Accounts are paired with high-deductible health plans (HDHPs), which generally have lower monthly premiums compared to traditional health insurance plans but require individuals to pay a higher deductible before their insurance coverage begins. For 2024, the HDHP’s minimum deductibles for an individual with self-only HDHP coverage is $1,600, and the limit for an individual with family HDHP coverage is $3,200.
With that basic understanding, here are some beneficial features of HSAs to consider:
- Contributions to a Health Savings Account are tax-deductible: Contributions to an HSA made by an individual, an employer, or both are tax-deductible. This means that the money you contribute to your HSA can be deducted from your taxable income, which can lower your tax bill.
- Earnings in a Health Savings Account are tax-free: Any earnings on the money in your HSA (e.g., interest or investment returns) are tax-free if the funds are used to pay for qualifying medical expenses.
- Withdrawals from an HSA for qualifying medical expenses are tax-free: If you use the money in your HSA to pay for qualifying medical expenses, the withdrawals are tax-free. This means that you won’t have to pay any taxes on the money you withdraw from your HSA to pay for medical expenses.
- HSAs have high contribution limits: The contribution limits for health savings account are generally higher than those for other types of tax-advantaged accounts, such as flexible spending accounts (FSAs). For 2024, the contribution limit for an individual with self-only HDHP coverage is $4,150, and the limit for an individual with family HDHP coverage is $8,300.
- Health Savings Accounts are portable: Unlike employer-sponsored health insurance plans, which are tied to your job, an HSA belongs to you and stays with you even if you change jobs or retire. This means that you can continue to use your HSA to pay for qualifying medical expenses even if you leave your current job.
- Health Savings Account rollovers are allowed: Whether you are looking to simplify your finances, benefit from lower plan costs, or a better set of investment choices, you are allowed to roll your HSA into a new plan.
- Health Savings Account funds don’t have an expiration date: Any money left in your HSA at the end of the year rolls over to the next year, so you don’t have to worry about losing it.
Here are some reasons to consider not using a Health Savings Account:
- You don’t have an HDHP: In order to be eligible to contribute to a Health Savings Account, you must be enrolled in an HDHP. If you have a traditional health insurance plan with a low deductible, you won’t be able to contribute to an HSA.
- You have high medical expenses: If you have high medical expenses, an HDHP with a Health Savings Account may not be the best option for you. With an HDHP, you will have to pay a higher deductible before your insurance coverage begins, which means you’ll have to pay more out of pocket before your insurance starts covering your medical expenses.
- You don’t have the funds to contribute to a Health Savings Account: If you don’t have the extra funds to contribute to an HSA, it may not make sense to enroll in an HDHP. While HDHPs generally have lower monthly premiums compared to traditional health insurance plans, you’ll still need to be able to pay for your medical expenses until your deductible is met.
Update Your Insurance Coverage to Ensure Current Insurance Needs are Met
This is especially important if you have a family and do not have the right amount of home, auto, life and/or disability insurance.
For example, a sensible life insurance policy can provide the following for you:
- A predetermined death benefit amount for surviving family members in the event of the policy owner’s death.
- Liquidity and available funds to pay for a decedent’s debts, taxes, and the costs of estate administration.
- Beneficiaries with an inheritance that has been shifted from one generation to another in a tax-efficient manner
Seek out individual policies and try to avoid being dependent on your employer’s group life insurance policy if it does not have a conversion privilege. While the insurance landscape continues to evolve, exploring level-premium term insurance is a good starting point for most individuals and parents.
Matching the term of your policy with your largest liabilities like your mortgage, your children’s education expenses, and allows you to build up your financial resources. Oftentimes, a 20- or 30-year term policy can strike the right balance for those who need it most.
Seek out unbiased, objective perspectives from someone whose interests are aligned with your own.
Auto. Changes in your driving habits can influence your auto insurance rates, such as if you start commuting to work or if you stop driving for a period of time. Reviewing your coverage annually can help you adjust your coverage and potentially lower your rates.
Homeowners. As the value of your home changes over time, you’ll want your insurance coverage to reflect its current value. Reviewing your coverage annually can ensure that you have enough coverage to rebuild or repair your home in case of damage or loss. Not all coverage types are equal.
Disability. This type of insurance provides financial protection for professionals in the event of an illness or injury that prevents them from working. This is the most important benefit as it ensures that the individual can maintain their income and support themselves and their families.
Disability insurance can also help cover the cost of medical expenses related to the disability, which can be a significant financial burden for someone who is unable to work.
Disability insurance can also help cover other expenses such as rehabilitation costs and help to maintain the individual’s standard of living.
It’s worth noting that disability insurance can help individuals to maintain their independence and self-sufficiency, and it can also help to protect their professional reputation and career prospects. It also helps to avoid the financial burden of disability on the family. Not all disability insurance policies are alike. We’ll look to dive deeper into this topic in a separate, dedicated blog post.
Umbrella. An umbrella insurance policy can provide two main benefits to individuals and families.
The primary benefit of an umbrella policy is increased liability coverage. An umbrella policy can provide additional liability coverage beyond what your regular insurance policies, such as your auto or homeowners insurance, already provide. This can be especially valuable in case of a catastrophic event, such as a severe car accident or a lawsuit, where the damages and legal fees may exceed the limits of your regular insurance policies.
Another benefit is protection from certain types of claims and lawsuits that may not be covered by your regular insurance policies. For example, an umbrella policy may provide coverage for defamation of character, false arrest, or invasion of privacy.
A specific example of how an umbrella policy can be beneficial is if you are involved in a car accident and the other party sues for damages that exceeds the limits of your auto insurance policy. As an umbrella policy holder, you could use the additional liability coverage provided by their umbrella policy to help cover your legal fees and any additional damages that are awarded to the other party.
It’s important to note that umbrella insurance policies are often relatively affordable and can provide you and your family with significant peace of mind knowing that you have an added layer of protection for the unexpected.
In our next post, we will explore Estate Planning (Wills, Durable Power of Attorney, and Advance Directives) and Education Funding (529s).
The Next Step
When you know who and what are truly important, you can create incredible clarity about your spending and saving.
Clarity to confidently spend on things that matter. Clarity to avoid spending your hard-earned resources on things that aren’t aligned with what you want in life.
As your financial planner in Saint Louis, we can help you plan for the future and enjoy the present moment.
Start feeling more confident that you are making progress toward your savings priorities.
When you thoughtfully execute on this approach, you can increase the likelihood of achieving your goals, setting new ones, and enjoying the present moment.
Frequently, proactive and open collaboration with your tax and estate planning professionals can help you work towards your financial planning goals. Working with your financial planner in Saint Louis can provide you with the right mix of accountability, collaboration, and long-term thinking.
If you’re unsure about your next step, let’s talk.
Disclosure
This commentary is provided for educational and informational purposes only and should not be construed as investment, tax, or legal advice. The information contained herein has been obtained from sources deemed reliable but is not guaranteed and may become outdated or otherwise superseded without notice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decision.