Health Insurance: Your Complete Guide to Not Making Expensive Mistakes
The Hidden Expense That Could Derail Your FI Plans
If you’re in the United States, health insurance might be the most important financial decision you make each year, and the one most people get completely wrong. This is not a political newsletter, so I won’t be talking about how to improve the healthcare system. I’m simply going to tell you how it works today and how you can navigate it.
The average American family spends about $27,000 annually (source) when you combine employer-sponsored health insurance premiums ($25,572 for family coverage in 2024) plus out-of-pocket medical expenses ($1,514 per person). Using our 25x rule, that's $675,000 you need for your FI number just to cover healthcare costs. Get this decision wrong, and you could easily add years to your working life or face financial catastrophe from a single medical emergency. Today we're going to cut through the confusion and show you exactly how to choose health insurance that protects both your health and your wealth, including how to bridge the gap to Medicare if you retire early.
It’s not possible to make a single recommendation for everyone. Your location, family size, and medical history mean you need to figure out what is best for you. However, I can show you what to look at and where the common mistakes are.
I am mostly talking about employer health plans in this post because I assume most readers are working. The costs and plan types are also applicable to the individual marketplace, but I won’t be covering the specifics of managing income during early retirement for ACA subsidies or explain my current health insurance setup.
If your employer offers health insurance, it’s usually in your interest to accept it. The cost you see is partially subsidized by your employer and almost always cheaper than what you can obtain privately. (That doesn’t mean it’s a good plan, just that it’s probably better than your alternatives.)
The Health Insurance Landscape: What You Actually Need to Know
The health insurance industry loves acronyms: HMO, PPO, EPO, POS, HDHP, HSA. Most people's eyes glaze over at this alphabet soup, which is exactly what insurance companies want. Confused customers make profitable customers.
Let's simplify this. There are really only a few types of plans you need to understand:
Health Maintenance Organization (HMO)
How it works: You choose a primary care physician (PCP) who manages all your care and provides referrals to see specialists. You must stay within the plan's network.
The math: Lowest monthly premiums, predictable copay costs, but zero coverage for out-of-network care.
Example: $350/month premium, $20 copays for doctor visits, $1,500 deductible, but if you go to the wrong emergency room, you could pay $15,000 out of pocket.
Best for: Healthy people who don't mind restrictions and want predictable costs.
Note: Be aware that HMO networks are unlikely to include the top doctors, are usually geographically-limited, and have small networks that can make getting appointments harder. However, if you’re 18 years old and in perfect health, you might not care!
Preferred Provider Organization (PPO)
How it works: You can see any doctor without referrals, but pay less when you use in-network providers.
The math: Higher monthly premiums but more flexibility and some out-of-network coverage.
Example: $550/month premium, $2,500 deductible, but you can see any specialist and get partial coverage even out-of-network.
Best for: People who want maximum flexibility and are willing to pay for it.
Note: PPOs usually have the best network, but you pay for it. Many elite doctors will only accept PPO plans because they pay more than other types.
Exclusive Provider Organization (EPO)
How it works: Like HMO restrictions but without referral requirements.
The math: Middle ground between HMO and PPO costs.
Best for: People who want some flexibility without PPO premium costs.
Point of Service (POS)
How it works: Hybrid of HMO and PPO. You choose a primary care physician who coordinates your care, but you can go out-of-network for higher costs.
The math: Premiums between HMO and PPO levels. Low costs for in-network care with PCP referrals, higher costs for out-of-network care.
Example: $420/month premium, $20 copays with referrals, but $2,000 deductible and 30% coinsurance if you go out-of-network.
Best for: People who want a primary care physician to coordinate care but occasionally need out-of-network flexibility.
Recap of Plan Types
Warning: you must read the plan documents for specifics. While some terminology is regulated, some are not. The name of the plan doesn’t mean anything. An EPO in Oklahoma can have a completely different set of conditions than one in Maine. The insurance companies are counting on you picking the wrong plan! (I’ll explain why later in this post.)
Typical Definitions
HMO: Most restrictive. All care is coordinated by your PCP and you have no out-of-network coverage. Typically these are small networks.
EPO: You do not need to have a PCP referral, but you must stay within network.
POS: You must have a PCP referral, but you do have some out-of-network benefits.
PPO: You do not need to have a PCP referral, and you can go out of network.
High Deductible Health Plan (HDHP)
How it works: Low monthly premiums but high deductibles. The key benefit: eligibility for a Health Savings Account (HSA).
The math: This is where it gets interesting for FI-minded people.
Example: $280/month premium, $3,500 deductible, but access to tax-advantaged HSA.
Best for: Healthy people focused on long-term wealth building (more on this below).
Note: HDHPs are a subset of other plan types. For example, you can have a $0 deductible PPO or an HDHP PPO. What makes it an HDHP is a higher deductible and access to an HSA.
The True Cost Calculation Most People Miss
Here's where most people screw up: they focus only on monthly premiums and ignore total costs.
The wrong way to think about costs: "Plan A costs $300/month, Plan B costs $500/month, so Plan A saves me $2,400/year."
The right way to calculate costs: Premium + deductible + expected copays/coinsurance + out-of-pocket maximum risk.
Real Example: Sarah's $2,400 "Savings" Disaster
Sarah chose the $300/month HMO over the $500/month PPO to "save money." Here's what actually happened:
Plan A (HMO):
Monthly premium: $300 × 12 = $3,600
Deductible: $1,500
Copays for routine care: $400
Out-of-network doctor visits: $8,500 (not covered)
Total cost: $14,000
Plan B (PPO):
Monthly premium: $500 × 12 = $6,000
Deductible: $2,500
Copays for routine care: $200
Same out-of-network doctor visits: $3,000 (covered at 70%)
Total cost: $11,700
Sarah's "cheaper" plan cost her $2,300 more. This is why you can't just look at premiums.
Why did Sarah go to an out-of-network doctor? Her HMO plan used a “narrow network” without a single specialist (for her condition) within 50 miles. The PPO may have had an alternative specialist in-network, but even if not, it still would have covered 70% of the cost!
Lesson: don’t shop on premiums alone!
Health Savings Accounts: The FI Secret Weapon
We’re going to move away from plan types for a moment to talk about the HSA because they are poorly understood and incredibly useful. I have always selected a plan with an HSA.
If you're pursuing financial independence, HSAs might be the most powerful tool you're not using.
The Triple Tax Advantage
HSAs are the only account that provides three tax benefits:
Tax-deductible contributions: Reduce your current tax bill
Tax-free growth: Money grows without annual taxes
Tax-free withdrawals: For qualified medical expenses
The Math That Will Blow Your Mind
2025 HSA contribution limits: $4,300 individual, $8,550 family (plus $1,000 catch-up if 55+)
Example calculation:
Annual contribution: $4,300
Tax savings (25% bracket): $1,075
Effective cost of contribution: $3,225
Value after 20 years at 7% growth: $95,000
Value after 30 years: $196,000
The kicker: After age 65, you can withdraw HSA funds for ANY purpose (taxed as ordinary income), making it function like a Traditional IRA. In other words, the best retirement account in existence is only available if you have a choose a certain type of health insurance plan! Blame Congress for this oddity if you want, but don’t ignore it.
Employer HSA Contributions: Free Money
Many employers contribute to employee HSAs. This is literally free money, but if you select anything other than the HDHP, you usually lose it. Do the math on your options.
Example: Your employer contributes $1,500, you contribute $2,800, total $4,300 annual HSA funding with only $2,800 out of your pocket.
My Personal HSA Strategy for FI
I contribute the maximum every year and never spend it, even if I have medical expenses. Why? Because you’re effectively removing super-advantaged dollars from your retirement account to pay current expenses. The money grows tax free, and you short-circuit that growth by spending it.
I plan to use my HSA as a standard retirement account after age 65, but there is another option if you are super detailed. There is no time limit on reimbursing yourself for medical expenses. That means you can spend cash today on healthcare and if you keep the receipts, you can pay yourself back in 40 years. Meanwhile, your account continued to grow during those 40 years.
I personally don’t want to keep 40 years of receipts and I don’t plan to have high taxable income in retirement, but it might make sense for you.
Important: You can only contribute to an HSA if you have a qualified HDHP. This is why many FI-focused people choose high-deductible plans.
The Five Most Expensive Health Insurance Mistakes
Mistake #1: Premium-Only Thinking
The error: Choosing plans based solely on monthly premiums. We explained this with Sarah above.
Example: Mike chose a $200/month plan over a $400/month plan. When his daughter broke her arm, the $5,000 deductible meant he paid $7,400 total vs. $6,200 with the "expensive" plan.
The lesson: Always calculate total expected annual costs, not just premiums.
Max, wait! How am I supposed to know that my daughter is going to break her arm? You don’t. However, you have a better idea than the insurance company does. If your daughter skateboards, mountain bikes, and rock climbs every week, buy the expensive plan. If your daughter prefers video games, reading, and painting, buy the cheaper one.
Mistake #2: Ignoring Provider Networks
The error: Not checking if your doctors and hospitals are in-network.
Example: Jennifer's cardiologist wasn't in her new plan's network. Her routine checkup cost $1,200 instead of a $40 copay.
The lesson: Before choosing any plan, verify that your current providers are in-network. If you don't have current providers, check that there are quality options near you.
This happens all the time. When I was shopping for insurance last year, the cheapest plan only had one hospital in-network in the entire county. There’s a reason it was so cheap.
Mistake #3: Wrong Plan for Your Health Status
The error: Choosing a plan that doesn't match your expected healthcare usage.
Healthy 25-year-old choosing expensive PPO: Pays $6,000/year in premiums for benefits they never use.
Chronic condition patient choosing HDHP: Hits $6,000 deductible every year, making total costs higher than a PPO would have been.
The lesson: Match your plan to your expected usage patterns.
This is the big one. Insurance companies want you to select the wrong plan. If you are healthy and purchase the Cadillac plan, they keep all your premiums and never pay out. If you are unhealthy and purchase the bare bones plan, you end up paying out-of-pocket for your healthcare. Once again, they keep your premiums and never pay out.
Here’s the funny thing: you know more about your health than they do. That means you need to use your inside information to pick the “perfectly sized” plan for your situation. Then you’ll beat them!
Example: if you are actively trying to become pregnant, don’t pick the bare bones plan because there will be many maternity appointments. You can select the platinum plan knowing you’re going to use it frequently before you even sign up!
Mistake #4: Not Understanding Deductibles vs. Out-of-Pocket Maximums
The error: Thinking deductible is the most you'll pay.
Real example: Tom's plan had a $3,000 deductible and $8,000 out-of-pocket maximum. After surgery, he owed $8,000, not $3,000, because the deductible is just when insurance starts paying. You still owe coinsurance until you hit the out-of-pocket max.
The lesson: The out-of-pocket maximum is the most you'll pay in a year for covered services. Plan your emergency fund accordingly.
Many people shop based on premium. Some will shop on deductible. I usually shop on network and out-of-pocket max. Personally, I am mainly insuring myself against catastrophe. I can afford a $500 x-ray. I can’t afford a million-dollar cancer treatment. If I develop cancer, that out-of-pocket max is going to be the most important number on the page.
Mistake #5: Auto-Renewing Without Reviewing
The error: Staying with the same plan year after year without comparing options.
The lesson: Your health needs, family situation, and available plans change. Review annually during open enrollment.
Don’t automatically buy the same insurance as last year. Every year, new plans come on the market. Every year prices change for existing plans. Insurers count on you automatically enrolling in the same plan and increase the price every year accordingly!
Choosing the Right Plan: A Decision Framework
Step 1: Calculate Your True Annual Income Available for Healthcare
Include both premiums and potential out-of-pocket costs in your budget.
Step 2: Estimate Your Expected Usage
Low usage (young, healthy):
1-2 doctor visits per year
No prescription medications
No chronic conditions
Consider: HDHP with HSA
Moderate usage (typical adult):
3-4 doctor visits per year
1-2 prescription medications
Occasional specialist visits
Consider: PPO or EPO with higher deductibles
High usage (chronic conditions, older adults):
Monthly doctor visits
Multiple prescriptions
Regular specialist care
Consider: PPO with lower deductibles
Step 3: Run the Numbers
For each plan option, calculate:
Annual premiums
Expected deductible costs
Expected copay/coinsurance costs
Worst-case scenario (hitting out-of-pocket maximum)
Step 4: Factor in HSA Benefits (If Applicable)
If you're eligible for an HSA, add the tax benefits to your calculation:
Tax savings on contributions
Long-term investment growth potential
Employer contributions
Example Plan Comparisons
Scenario A: Healthy 30-Year-Old Single Person
Option 1: HDHP + HSA
Premium: $280/month ($3,360/year)
Deductible: $3,500
HSA contribution: $4,300
Tax savings: $1,075 (25% bracket)
Expected annual medical costs: $500
Total out-of-pocket: $3,285 ($3,360 + $500 - $1,075 tax savings)
Option 2: PPO
Premium: $450/month ($5,400/year)
Deductible: $1,500
Expected annual medical costs: $300 (lower due to copays)
Total out-of-pocket: $5,700
Winner: HDHP + HSA saves $2,415 annually while building long-term wealth.
Scenario B: Family with Two Young Kids
Option 1: HDHP + HSA
Premium: $650/month ($7,800/year)
Deductible: $7,000 (family)
HSA contribution: $8,550
Tax savings: $2,138
Expected annual medical costs: $4,000 (pediatric visits, occasional illness)
Total out-of-pocket: $9,662
Option 2: PPO
Premium: $850/month ($10,200/year)
Deductible: $3,000 (family)
Expected annual medical costs: $2,000 (copays vs. deductible)
Total out-of-pocket: $12,200
Winner: Even with higher usage, HDHP + HSA saves $2,538 annually.
Scenario C: 55-Year-Old with Diabetes
Option 1: HDHP + HSA
Premium: $320/month ($3,840/year)
Deductible: $3,500
Expected annual medical costs: $3,500 (will hit deductible)
HSA tax savings: $1,075
Total out-of-pocket: $6,265
Option 2: PPO
Premium: $520/month ($6,240/year)
Deductible: $1,500
Expected annual medical costs: $2,000 (copays)
Total out-of-pocket: $8,240
Winner: HDHP + HSA still wins, saving $1,975 annually.
Note: The diabetes patient should also consider predictability. PPO offers more predictable monthly costs, which some people prefer even if total costs are higher.
Max, wait! These examples must be rigged. Why does the HDHP keep winning? Because low-deductible plans with strong networks are expensive. You are paying extra for peace of mind. People love the idea of a $0 deductible for car insurance, health insurance, and really all types of insurance. If something bad happens, I don’t pay a thing! Unfortunately, you very much did pay for “the thing.” You just prepaid it through higher premiums.
I self-insure when possible. Instead of paying monthly premiums to the insurance company, I pay it to myself in my brokerage account. When something bad happens, I have the money to cover it. Of course, for situations like cancer, self-insurance isn’t possible. That’s why I carry health insurance!
Health Insurance for Early Retirement: The Bridge to Medicare
If you're planning to retire before 65, health insurance becomes one of your biggest concerns. Here's your roadmap:
The Cost Reality
Health insurance for early retirees typically costs:
COBRA: $700-1,500/month (full employer plan cost)
ACA Marketplace without subsidies: $800-1,200/month
ACA Marketplace with subsidies: $0-600/month (if you qualify)
Option 1: COBRA Continuation Coverage
How it works: Continue your employer's plan for up to 18 months after leaving.
Pros: Keep the same doctors and coverage you know.
Cons: Expensive. You pay the full premium.
Example: If your employer's family plan costs $1,400/month total ($300 employee share + $1,100 employer share), you'll pay $1,400/month under COBRA.
Best for: People who want to maintain existing coverage for a limited time or have ongoing medical needs requiring continuity of care.
Option 2: ACA Marketplace Plans
How it works: Purchase individual insurance through Healthcare.gov or your state marketplace.
The subsidy opportunity: Here's where strategic planning pays off. ACA subsidies are based on your Modified Adjusted Gross Income (MAGI).
Example of strategic income management:
Couple, both 60, planning retirement
$2M portfolio generating potential $80,000 annual income
Strategy: Withdraw from Roth IRA and taxable accounts to show only $30,000 MAGI
Result: Qualify for premium tax credits reducing costs from $1,200/month to $400/month
Annual savings: $9,600
The math on subsidies: For 2025, a couple earning $32,000 might pay only $200/month for a Silver plan that would otherwise cost $1,100/month.
Option 3: Spouse's Employer Plan
How it works: If your spouse is still working, join their employer plan.
Pros: Usually the most cost-effective option.
Cons: Requires your spouse to keep working.
Option 4: Part-Time Employment
How it works: Work part-time for an employer that offers health benefits.
Example: Many retail and service companies offer health insurance to employees working 20+ hours per week.
Pros: Maintain group insurance rates while having some income.
Cons: You're not fully retired.
The HSA Bridge Strategy
Here's a niche strategy many early retirees don't know about: You can use HSA funds to pay COBRA premiums.
Example:
You have $50,000 in your HSA from years of HDHP contributions
COBRA costs $1,200/month ($14,400/year)
You can pay COBRA premiums tax-free from your HSA
This bridges you for 1.5 years using tax-advantaged funds
Important: You can only use HSA funds for COBRA premiums, not ACA marketplace premiums (unless you're receiving unemployment benefits).
Why is this useful? If you’re age 63.5, you can keep your employer plan until Medicare kicks in. As you can imagine, unsubsidized ACA coverage for a 64-year-old is exceedingly expensive.
Max, didn’t you tell me not to spend my HSA on healthcare? That was at age 22. If you’re 63, that HSA has been growing for 40+ years and now it’s time to take it out tax free.
The Goal: Make It to 65
All early retirement health insurance strategies have one goal: bridge the gap until Medicare eligibility at 65. Medicare premiums cost significantly less than private health insurance plans, making 65 a major financial milestone for healthcare costs.
My Recommendations
Action Steps by Life Stage
In Your 20s-30s (Healthy, Building Wealth)
Choose HDHP with HSA if available
Maximize HSA contributions (treat it as retirement account)
Pay medical expenses out of pocket when possible
Build emergency fund for potential high medical costs
In Your 40s-50s (Higher Income, Planning FI)
Continue maximizing HSA if still on HDHP
If health needs increase, consider switching to PPO
Start researching early retirement health insurance options
Build larger emergency fund for healthcare costs
Early Retirement (55-65)
Have 2-3 years of healthcare costs in cash/short-term investments
Understand COBRA vs. ACA marketplace options
Plan income management strategy for ACA subsidies
Use HSA funds strategically for healthcare costs
Common Questions About Health Insurance and Early Retirement
Q: Should I choose a plan based on my current health or potential future health needs?
A: Plan for your expected usage over the next year, but also consider your risk tolerance. If a catastrophic health event would derail your FI plans, lean toward more comprehensive coverage.
Q: How much should I budget for healthcare in early retirement?
A: Budget $15,000-25,000 annually for a couple, depending on your health status and chosen coverage level. This is often early retirees' second-largest expense after housing.
Q: Can I change health insurance plans during the year?
A: Generally no, unless you have a "qualifying life event" (job loss, marriage, birth of child, etc.) that triggers a special enrollment period.
The Bottom Line
Health insurance is too important to get wrong, especially if you're pursuing financial independence. The difference between good and bad health insurance decisions can easily add $100,000+ to your FI number or derail your early retirement plans entirely.
The key principles:
Look at total costs, not just premiums
Match your plan to your expected usage
Maximize HSA benefits if you're on an HDHP
Plan early for the coverage gap between employment and Medicare
Review and adjust annually
Remember: The goal isn't to find the cheapest health insurance. It's to find the most cost-effective coverage that protects both your health and your wealth while supporting your path to financial independence.
Next time, we'll tackle types of investments I don’t recommend and why.
Until then, your homework: Calculate the true annual cost of your current health insurance plan (premiums + deductible + expected out-of-pocket costs). If you're not maximizing an HSA and you're eligible, you're leaving money on the table.
Here's to protecting your health without destroying your wealth,
Max
Remember: Your health insurance decision affects both your annual expenses and your FI number. Every dollar you optimize here compounds over time, potentially saving you years of additional work.