You purchase insurance to protect yourself against the catastrophic. Paying a few hundred dollars to fix a broken window in your garage won't trigger a financial crisis for most households. Being forced to rebuild your two-car garage after it is flattened by a fallen tree is when you look to your homeowner's insurance to come to the rescue.

Protection against the catastrophic describes long-term disability insurance as well. Miss a few days of work due to the flu, and you won't be financially devastated, even if you have already used up all of your PTO (Paid Time Off) for the year. How financially devastating would it be if you end up missing a chunk of time at work and do not have adequate disability insurance coverage in place?

Assuming the purpose of insurance is to protect yourself against the catastrophic, please explain what happened to the health insurance industry. Most plans pay pretty much all of your health costs each year. Yes, you get hit with co-pays and a relatively modest annual deductible. But that's about it for most people with traditional health insurance coverage.

When you think about it, however, there is a very good reason as to why the health insurance industry evolved into more of a payment program than a true insurance product. Leaders of the healthcare industry realized that it would be less expensive in the long-run for insurance companies to encourage people to seek out preventative care instead of paying for costly medical care that could have been avoided with earlier detection.

Now that consumers are better informed about preventative healthcare, let's review a strategy that helps people not only reduce their health insurance premiums but also build up money within a tax-advantaged savings account.

HSAs

Back in 2004, President Bush introduced Health Savings Accounts (HSA). Only individuals or families covered under a high-deductible health insurance plan during the year are eligible to contribute to an HSA. For 2009, the minimum annual deductible to qualify as a high-deductible plan is $1,150 for individuals or $2,300 for families.

Here are four tax breaks available to you if you contribute to an HSA:

- Money contributed into an HSA is tax-deductible. Either you contribute into an HSA on your own, or your employer contributes on your behalf.

- Money invested within the HSA is your money and grows tax-deferred. Unlike Flexible Spending Accounts (FSA) offered to you as part of your employee benefit package where you set aside a set amount of money to pay for your family's healthcare costs with pre-tax dollars, there is no "use it or lose it" pitfall with HSAs.

- Money can be withdrawn tax-free from your HSA at any time to pay for your family's healthcare expenses.

- Any money remaining in your HSA upon your reaching the age of 65 is available to subsidize your retirement.

The Winning Combination

As health insurance costs continue to skyrocket, Health Savings Accounts (HSAs) provide you with a great opportunity. Assuming you and your family are relatively healthy, and you won't choose to routinely forgo your annual physical to save a few hundred dollars in medical bills, start by switching to a high-deductible health insurance product. You will immediately realize a sizeable decrease in your monthly premium - generally equivalent to the increase in your annual deductible.

Next, open up and fully fund an HSA for the year. Don't forget to deduct your HSA contributions on your tax return that year.

Assuming you and your family have a relatively healthy year, you will end up ahead of the game, since you get to keep all the money leftover in your HSA at the end of the year.

What happens if you incur substantial healthcare costs during the year? Yes, you will probably deplete your HSA. But once you spend the full amount of your annual deductible, your insurance takes over like insurance is supposed to do and protects you against any further financial hardship.

Bang For Your Buck

Are your ready for some more good news about HSAs? When these tax-advantaged healthcare savings accounts were first introduced back in 2004, the amount you could contribute into an HSA each year was a function of your annual deductible.

A few years ago, the rules were changed to make HSAs more attractive. For families, as long as your annual deductible is at least $2,300 (in 2009), you can contribute up to $5,950 into your HSA. Single individuals with a health insurance deductible of at least $1,100 in 2009 are eligible to deposit $3,000 into an HSA this year. Anyone 50 or older can contribute an extra $1,000 into an HSA this year.

What this new rule means to you is that you can put away almost triple your annual deductible. So even if you tap into your HSA to pay 100% of your deductible, you still have a decent amount of money left over growing tax-deferred to pay for future healthcare costs or to eventually help fund your retirement.

Survival of the Frugalist

Why not let your health insurance do it's job and protect you and your family against the catastrophic? Then, couple this less expensive insurance with pre-tax contributions into an HSA, and you have discovered one strategy to minimize the after-tax cost of your family's healthcare costs in today's market.

For more information about HSAs (and some good bedtime reading), check out IRS Publication 969 available at http://www.irs.gov


Andrew Schwartz CPA is a partner in the Woburn, MA CPA firm, Schwartz & Schwartz, PC, a firm specializing in the tax issues affecting healthcare professionals and their practices. Andrew is also the founder of The MDTAXES Network (www.mdtaxes.com), an association of CPAs who specializes in the tax issues affecting doctors and their practices.