How Your Health Should Factor Into Your Financial Planning

The age-old saying that health is wealth may, in fact, be true. Health and financial planning must go hand in hand to ensure you always have enough savings to tackle the unexpected. Most people might not immediately realize the link between health and wealth. But your health and finances are more closely linked than you might think. From medical expenses to the impact of illness or disability on your ability to earn a living, your health can have a significant effect on your financial well-being. Therefore, it is essential to consider your health when making financial plans.

A financial advisor can help you understand how to factor your health into your financial planning. This article will further explore how health issues can impact your finances and investments that can help you target health-related expenses.

What is health or medical financial planning?

Health or medical financial planning refers to preparing financially for potential healthcare expenses, both in the short and long term. This type of planning involves assessing your current and future healthcare needs, estimating the cost of those needs, and developing a strategy to pay for them. Health planning is essential irrespective of your current health status. Medical issues can account for a major part of your expenses. According to the National Health Expenditure Account (NHEA), the official estimate of total healthcare spending in the United States grew by 2.7% in 2021, amounting to $12,914 per person. Health spending accounted for 18.3% of the Gross Domestic Product in the same year. Given the high costs of healthcare, it is important for you to plan ahead.

Here are some health factors to consider in your financial plan:

1. Take into account medical expenses

As you age, the likelihood of developing health issues increases. This amplifies the medical costs that come with it and brings the need to factor in potential medical expenses in your financial plan, including insurance premiums, deductibles, and co-pays. The average national cost of individual health insurance for a 40-year-old in 2023 is $560, a 4% increase from 2022 for silver plans. The numbers can differ for different states based on the cost of living and healthcare. For instance, Georgia saw the highest increase since last year, with health insurance costs going up by 20%.

Additionally, the average monthly price of health insurance is $882 in Wyoming, $792 in South Dakota, $776 in New York, $469 in South Carolina, and $372 in New Hampshire. The costs for platinum and bronze plans can further differ based on the coverage they offer. Apart from this, medical inflation is another concern that you need to plan for. Medical inflation can increase the costs of medicines, in-hospital treatments, outpatient care, and more. Medical inflation rose 2.3% in the country in February 2023 from last year. Therefore, saving for potential health issues, medical emergencies, accidents, etc., becomes critical.

2. Consider buying disability insurance

According to the Social Security Administration, about one in four 20-year-olds will become disabled before reaching retirement age. Surprisingly, 65% of employees working in the private sector have no long-term disability insurance. Disability insurance can help cover living expenses, medical bills, and other necessary costs for your loved ones. An accident can occur anytime and without warning, which is why it is crucial to plan for such adverse events. In the event of a severe illness or injury, you may become unable to work, resulting in a loss of income. Disability insurance can help protect you and your family by providing income replacement in such situations. This is particularly important if you are the sole earner in your family and other family members depend on you for their financial needs. While some employers provide disability insurance coverage, it may not be enough to cover all expenses. A personal disability insurance policy can supplement the coverage provided by an employer.

3. Invest in long-term care insurance

It is projected that by 2040, about one in five Americans will be 65 or older. With an aging population, the need for long-term care is increasing. Long-term care can be very expensive, and it is often not covered by health insurance or Medicare. If you develop a chronic illness or disability that requires long-term care, you should consider the costs of care and factor them into your financial plan. Long-term care insurance may be an option to help cover these costs. The insurance can help cover the costs of medical care, including in-home care, assisted living, and nursing home care. Without long-term care insurance, you or your family may be forced to use your retirement savings or assets to pay for your expenses.

4. Carefully plan for retirement

Your health can impact your retirement plans. If you anticipate needing long-term care or expect to have medical expenses in retirement, you may need to adjust your retirement savings plan to ensure you have enough money to cover these expenses. This means your retirement savings, such as 401(k) accounts, Individual Retirement Accounts (IRAs), etc., must account for your future medical expenses along with your routine expenditure like groceries, travel, utilities, etc.

5. Aim to maintain a healthy lifestyle

Apart from insurance and long-term care, it is also essential to maintain a healthy lifestyle to prevent health problems and reduce the likelihood of incurring medical expenses. This includes exercising regularly, eating a balanced diet, getting enough sleep, and avoiding unhealthy habits like smoking and excessive drinking.

Selecting the right health insurance

Buying a suitable health insurance plan is one of the most important decisions you can make.

Here are some things to focus on when choosing an insurance plan:

1. Start by evaluating your health insurance options, including deductibles, co-pays, and coverage limits.
2. Consider your employer-provided health plans and compare the coverage with other plans. It is essential to have your individual insurance as you may lose your employer’s cover if you leave your job or retire.
3. Next, estimate the cost of routine healthcare expenses, such as regular check-ups, screenings, and prescriptions. This will help you pick suitable coverage.
4. Anticipate the cost of more significant healthcare events, such as surgeries, hospital stays, and long-term care. Make sure to account for medical inflation in this step.
5. It is also essential to plan for unexpected medical emergencies or accidents that could require treatment.

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7 factors that influence health insurance premiums

The cost of health insurance is a valid concern that may come in the way of selecting a comprehensive plan. Understanding how it is calculated is essential.

Here are some factors that may impact the health insurance premium:

1. Age: Generally, older individuals are at higher risk of developing health conditions, so premiums for health insurance are typically higher for older individuals. This is why getting health insurance at a young age is recommended. This will help you save a lot of money over the years.
2. Health status: Individuals with pre-existing health conditions or a history of medical issues may pay higher premiums to offset the potential costs of care. If you already suffer from illnesses, such as heart problems, diabetes, thyroid, asthma, etc., you may be asked to pay a higher premium.
3. Lifestyle habits: People who smoke or drink excessively may pay higher premiums to offset the potential costs of care.
4. Coverage level: The coverage and benefits offered by a health insurance plan can also affect the premium. Plans with higher coverage levels and more benefits typically have higher premiums. For instance, platinum and silver plans may be costlier than bronze plans.
5. Deductibles and co-payments: Plans with higher deductibles and co-payments may have lower premiums, while plans with lower deductibles and co-payments may have higher premiums.
6. Geographic location: The cost of healthcare can vary depending on where you live. This, in turn, affects the premium.
7. Plan type: Different types of health insurance plans, such as disability insurance, long-term care health insurance, etc., may have different premiums depending on the benefits and coverage offered.

What other steps can you take to incorporate health into your financial planning?

Apart from insurance, you can also save and invest in other instruments to secure your future against medical costs. Here are some options:

1. Invest in a Health Savings Account (HSA)

An HSA is a tax-advantaged savings account used to pay for qualifying medical expenses. It is available to individuals with a High-Deductible Health Plan (HDHP). An HSA allows you to save for future healthcare expenses. The funds in an HSA can only be used to pay for qualifying medical expenses, such as deductibles, co-payments, and other out-of-pocket costs. The HSA has annual contribution limits that may change every year. As of 2023, the annual limit for self-only plans is $3,850. The HSA contribution limit for family coverage can be up to $7,750. The account also allows a catch-up contribution of $1,000 for individuals aged 55 or over.

2. Consider investing in a Flexible Spending Account (FSA)

An FSA is another tax-advantaged account that can be used to save for qualified medical expenses. It is typically offered through an employer and allows employees to set aside pre-tax dollars for qualified medical expenses. The employer may also contribute to an FSA. The contributions are deducted from your earnings. The money can be withdrawn tax-free as long as it is used for qualified medical expenses. The 2023 annual contribution limit for an FSA is $3,050 per employee.

3. Register for Medicare

Medicare is a federal health insurance program that provides coverage for people aged 65 or older, people with specific disabilities, and people with End-Stage Renal Disease (ESRD). Medicare was created in 1965 as part of the Social Security Act and is administered by the Centers for Medicare and Medicaid Services (CMS). Medicare provides coverage for Part A (hospital care), Part B (medical services), Part C (also called Medicare Advantage), and Part D (prescription drugs). Medicare can be used by everyone who has lived in the country legally for at least five years and is 65 or older. You can automatically enroll in Parts A and B if you receive Social Security benefits. However, Parts C and D coverage is optional, and you can register for it separately.

In addition to the above, you can follow these steps too:

1. Consider hiring a health advisor to select suitable investments and savings plan

A health advisor or a financial advisor can help you understand your future financial needs and save enough to cater to them. A health advisor can provide guidance on various healthcare-related investment options, such as HSAs, FSAs, health insurance, and long-term care insurance, among others. A health advisor can also help you understand your healthcare costs and expenses, such as deductibles, premiums, and co-payments, and develop a plan to manage these costs. This can include evaluating different insurance plans, reviewing healthcare bills and claims, and negotiating with healthcare providers to reduce costs. The financial advisor can also help you plan other components of financial planning that can be affected due to health, such as estate planning. Estate planning is crucial for everyone but  can be especially important for individuals with health issues. It can help protect your assets, make healthcare decisions, address end-of-life issues, and minimize taxes and expenses associated with the transfer of assets after your death.

2. Prioritize preventive healthcare to ensure good health

Regular check-ups and preventive care can help you detect and treat health problems early before they become more severe and costly. Hence, be regular with periodic screenings, immunizations, and other preventive measures. If you have a chronic health condition, like asthma, diabetes, or high blood pressure, managing your condition through medication and lifestyle changes can help prevent complications and reduce healthcare costs. Maintaining a healthy lifestyle with adequate exercise and fresh food is also essential.

3. Consider your healthcare needs and choose the right plan for your requirements

Health plans can vary in terms of benefits, costs, and provider networks. You must analyze your needs and buy a plan that caters to your unique needs. Consider your healthcare requirements, such as the frequency of doctor visits, prescription drug needs, and any ongoing health conditions. Additionally, you must pay attention to your age, gender, profession, etc., as they could also impact your healthcare needs.

To conclude

Financial planning, insurance, savings, investments, and more all go hand in hand. Therefore, you must focus on creating a wholesome financial plan that considers all of these. Medical financial planning is essential and can make you feel more in control of your healthcare expenses and enable you to make informed decisions about your healthcare needs. It can ensure that your other financial goals do not overlap with your medical costs and you do not compromise one for another. So, prioritize your healthcare needs, and plan for them just as you prepare for other goals like retirement, children’s higher education, house purchase, etc.

A financial advisor can help you plan for your future healthcare financial goals. You can use WiserAdvisor’s free advisor match service to hire a health advisor in your city. All you have to do is answer a few simple questions based on your financial needs, and the match tool will help connect you with 1-3 advisors best suited to help you reach your financial goals and requirements.