A Health Emergency Fund

Even with good health insurance, a health emergency or a prolonged illness can be a financial disaster. Health insurance deductibles, co-payments, emergency room costs, and other costs of illness can add up in a hurry.

A health savings account (HSA) is one way you can put aside tax-free money for a health emergency. HSAs were established in 2003. If you are covered by a type of insurance known as a high-deductible insurance plan, you can make tax-deductible contributions to an HSA. Your employer may also make tax-deductible contributions.

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“An HSA account is very different from having a general emergency fund account,” says Joseph J. Porco, managing member of the Financial Security Group, LLC, in Newtown, Conn. “An emergency fund is about more than just out-of-pocket medical expenses. If possible, it’s a good idea to have both.”

How Much of an Emergency Fund Do You Need?

For an older adult, a health emergency might result in the need for long-term care, possibly for the rest of the senior’s life. For a young adult supporting a family, a medical emergency might be much more than just the cost of illness. Your health emergency could cause a disability that results in loss of income over an extended period. That means you should save enough to cover all your expenses.

“Most advisers would say you should have enough emergency funds saved to cover your family expenses for three to six months. I would recommend trying to put enough aside to cover all your expenses, not just health expenses, for 6 to 12 months,” says Porco.

How much you need for a health emergency and how much you can actually put into an emergency fund will depend on your family size, your income, your health status, and your age. But your first step is to understand your health insurance situation.

“The best way to start is to sit down with a financial adviser and figure out what your insurance actually covers and what it doesn’t cover. What are your insurance limits? What kind of medical bills might arise that you would be responsible for? Get some expert advice on how best to cover your actual needs,” advises Porco.

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What Insurance May Not Cover

How much insurance companies actually pay for accidents, cancer treatment, or surgery depends on what kind of insurance you have, but there are usually limits. Here are some facts to consider:

  • Cost of illness. Most insurance companies have a cap on how much they will pay for a long-term illness. A recent survey found that 10 percent of people with cancer have hit their lifetime cap and are no longer covered by insurance. Looking forward, however, the new health care reform law will eliminate caps on lifetime insurance by 2014.
  • Emergency room cost. If you have an accident that requires emergency treatment and you end up in an emergency room outside your insurance network, you may not be covered. One study found that HMOs in California denied one out of every six claims for emergency room costs.
  • Surgical coverage. You may be surprised at what your insurance company considers non-covered surgery. There can be a big gray area between covered “reconstructive” surgery and uncovered “cosmetic” surgery. Even when surgery is covered, your deductible may be $500 or more, and you may still be responsible for up to 25 percent or more of surgical costs, depending on the specifics of your plan.