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A high deductible health plan, or HDHP, has a higher deductible than other types of insurance plans, as the name implies.

In return for higher deductibles, these plans usually charge lower premiums than other types of health plans.
You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for out-of-pocket, qualified medical expenses before the deductible kicks in.

An HDHP can be a good, affordable health insurance option for people who are relatively healthy and don’t see doctors or receive medical services frequently.

But these plans may not be the best choice for everyone. Read on for important things to know about HDHPs.

How Does a High Deductible Health Plan Work?

When you sign up for an HDHP, you will pay most of your medical bills out of pocket until you reach the deductible (with some exceptions, explained below).

Your deductible is the amount you’ll pay out of pocket for medical expenses before your insurance pays anything.

Under current law, in order to be considered an HDHP, the deductible must be at least $1,400 for an individual, and at least $7,000 for a family.

But deductibles can be significantly higher than these minimums, and are allowed to be as high as $2,800 for an individual and $14,000 for a family.

As with other insurance plans, HDHPs come with out-of-pocket maximums. This is the most you would ever have to pay out of pocket–that includes your deductible, copayments, and coinsurance (but exclude premiums and medical costs not covered by your plan).

Out-of-pocket maximums for HDHP plans can’t exceed $2,800 for an individual and $14,000 for a family.
Despite the high deductible with HDHPs, some health care costs may be covered 100 percent even before you meet your deductible.

The government requires all HDHPs sold on the federal insurance marketplace and many other HDHP plans to cover a fair number of preventive services without charging you a copayment or coinsurance, even if you haven’t met your deductible.

You can find a list of those covered services for adults , specifically for women , and for children at HealthCare.gov.

How Does an HDHP Work With a Health Savings Account?

When you purchase a high deductible health plan, whether it’s through the federal marketplace, an employer, or directly through an insurance company, you may also open a health savings account (HSA).

You can put aside pre-tax income in the HSA to help pay your deductible or other qualified health care expenses. However, HSA funds typically can not be used to pay for health insurance premiums.

Earnings also grow tax-free in an HSA account, and withdrawals used to pay for qualified healthcare expenses are not subject to federal taxes. As a result, HSAs can result in significant tax savings.

Currently the maximum you can save in an HSA each year and receive the tax benefits is $3,600 for an individual and $7,200 for a family. Some employers make contributions to employee HSA accounts as part of their benefits package.

HSAs are also portable, meaning you take your HSA with you when you change jobs or leave your employer for any reason. Your HSA balance rolls over year to year, so you can build up reserves to pay for health care items and services you need later.

You may contribute to an HSA only if you have an HDHP.

What are the Pros and Cons of HDHPs?

As with any health insurance plan, there are both advantages and disadvantages of HDHPs. Here are some to consider.

Advantages of HDHPs

•  Lower premiums. In exchange for the high deductible, HDHPs typically charge lower premiums than traditional healthcare plans like PPOs.
•  You can combine an HDHP with an HSA. This can help you cover out-of-pocket medical expenses with pre-tax dollars, which make these costs more affordable. And, these accounts never expire.
•  You get the same essential benefits and no-cost preventive care as other plans. HDHPs are required to cover the same types of healthcare expenses as other plans (after you meet the deductible). And, they offer the same no-cost preventive services as their more expensive counterparts.

Disadvantages of HDHPs

•  High out-of-pocket costs due to high deductibles. You will need to pay for medical expenses out of pocket (because of the high deductible), while also paying your monthly premiums.
•  A disincentive to receive care. You might be inclined to skip doctor visits because you’re not used to having such high out-of-pocket costs. Forgoing treatment, however, could cause more serious health problems down the line.
•  Emergencies can be expensive. If you need unexpected care or go to the hospital, an HDHP will not pay anything until you have met your high deductible. This can mean having to come with a significant amount of cash to cover your medical bills.

HDHPs vs. PPOs

A preferred provider organization, or PPO, is a traditional type of health plan that usually has a lower deductible than an HDHP, but charges higher premiums.

With a PPO, you will typically only have to pay a copayment, or “copay,” when you see a doctor or fill a prescription.

For other medical services and treatments, you will likely have to pay out of pocket until you reach the deductible, but that will happen sooner than it would with a HDHP.

Both PPOs and HDHPs typically have a network of providers you can work with to get the best rates.

In a PPO, however, the provider list may be smaller than it is with an HDHP. To get the best rate on your care, members of either type of plan will want to be sure they are sticking to that list.

A PPO may be advantageous if you go to the doctor a lot and/or run into unexpected medical expenses, since you start to get help from the health plan much earlier in the year than you might with an HDHP.

A PPO could end up costing you more, however, if you end up having a year with low medical expenses.

The Takeaway

So are HDHPs worth it? With an HDHP, you will likely pay a lower monthly premium than you would with a traditional health plan, such as a PPO, but you will have a higher deductible. If you combine your HDHP with an HSA, you can pay that deductible, plus other qualified medical expenses, using money you set aside in your tax-free HSA. If you are young and/or generally healthy with no chronic or long-term conditions, an HDHP may be the most affordable option for you.

On the other hand, if you have a medical condition and you make frequent doctor visits, you may find you need coverage that kicks in sooner than it would with an HDHP plan. It can be a good idea to estimate your health expenses for the upcoming year and get a rough idea of how much you will be responsible for out of pocket with an HDHP before you sign up. You might want to use a budgeting app, such as SoFi Relay, which makes it easy to categorize and track all of your expenses in one mobile dashboard.

Health insurance is just one way to protect your budget, but making sure you have insurance on your home can also help you avoid expenses in the future. SoFi Protect and Gabi offer insurance for both renters and homeowners, so you can be sure that your home, and the things inside you care about, are protected.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Insurance not available in all states.
Gabi is a registered service mark of Gabi Personal Insurance Agency, Inc.
SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOCO21017

The future is here, and while the flying cars that were promised haven’t arrived yet, the finance world is speeding full-force into the future with everything from wireless payment apps on our phones to entirely decentralized finance systems.

Decentralized finance, known as DeFi for short, is a fundamentally new financial system that moves monetary control away from centralized banks and towards public blockchains.

Put more simply, DeFi has the potential to change the underlying mechanics of financing and banking, as well as how people access financial services, by using the internet and smart devices instead of going through a centralized bank.

What Is Centralized Finance?

In order to understand DeFi, it is helpful to understand how the traditional financial system works. In general, the current US financial system is largely controlled by central authorities.

For example, some aspects of the financial system are controlled by the Federal Reserve (sometimes referred to as “The Fed”). The Federal Reserve, which serves as the nation’s central bank, was created in 1913 after several financial panics caused people to withdraw their money from decentralized banks. Mass withdrawals of money caused banks to fail and incited more financial crises.

In response to these crises, the US government created the Federal Reserve, which acts as a centralized banking system and attempts to stabilize the economy through means such as managing national monetary policy and regulating banks. Banks, which are regulated by the Fed, also have their own controls and regulations on how finances are conducted.

For example, a bank might require a driver’s license to open a checking account or a certain credit score to take out a loan.

Simply stated, whether buying groceries with a debit card or saving for retirement, most of our financial transactions go through a bank, lender, investment company, or financial institution that is highly regulated.

Why DeFi?

While centralized banking was created in order to foster economic stability, it has come with restrictions on how people can access financial options, and with criticisms that putting financial control in the hands of a central body can create more risk if that central body gets it wrong. For example, what if the Fed decides to print too much money and inflation explodes or interest rates shut out people from accessing credit lines?

Or what about credit rates in general—if people take financing out of regulated contexts, could consumers see higher interest rates on their investments?

For example, as discussed above, most financial transactions take place through intermediaries: A bank account is required in order to use a debit card. An account at a financial institution is required in order to earn interest on money.

A broker is required in order to invest in the stock market. Each of these intermediaries is a product of the centralization of the nation’s financial system—and each intermediary potentially minimizes consumers’ financial earnings.

In the most elemental way, when money is deposited in a savings account, it earns interest. The interest that money earns is funded by the financial institution where the account is located. That financial institution earns money by lending depositors’ money to borrowers, who pay interest to the financial institution.

But the interest rate earned on a savings account is not the same as the interest rate the financial institution charges the borrower. Because it is acting as an intermediary between saver and borrower, the financial institution controls both interest rates.

But would both savers and borrowers get a better deal if it was possible to make secure financial transactions without an intermediary like a bank or other financial institution?

These are some of the questions about centralized finance that supporters of decentralized finance think that DeFi can answer without necessarily losing the stability created by a centralized bank.

What Is Decentralized Finance?

At its most basic, the idea behind decentralized finance is that it would truly put money in an individual’s control. While it might seem like there is individual control over money though robust banking options, checking and savings accounts, financial management apps, and ATM access, each of those things actually requires turning over that money to an institution and trusting that intermediary to manage it. The underlying goal of DeFi is to give actual control by using blockchain technology and open source coding to do the same types of transactions that currently take place largely through financial institutions.

Blockchain technology is a term commonly used in relation to cryptocurrency. At its most basic, blockchain can be thought of as a secure logbook that records transactions but is not controlled by a centralized institution. Rather, accountability in the blockchain is ensured because the “chain” is not editable and is stored in many places instead of in one centralized institution.

If this sounds familiar, it may be because blockchain serves as the “building blocks” of cryptocurrency like bitcoin. To understand DeFi, however, it is only important to understand that blockchain is secure, automatically generated, and able to be examined and tracked, just like a physical ledger. And unlike banks, blockchain is stored on users’ computers, which means that it’s not controlled by a central authority like the Fed.

In order for cryptocurrency like bitcoin to exist, it needs a secure ledger to track it—that’s blockchain. So is DeFi just a synonym for bitcoin and other cryptocurrencies? Not exactly. While cryptocurrencies are decentralized when it comes to issuance, transfer, and storage, they are still centralized when it comes to access and management.

Specifically, you still need to access cryptocurrencies through centralized exchanges, and many cryptocurrency projects are managed through companies which functionally act as that intermediary that DeFi seeks to eliminate. Some cryptocurrencies even tie their worth to physical currencies like the US dollar to attempt to provide stability.

DeFi takes crypto to the next level by attempting to give the benefits of cryptocurrency without the need to tie access and management through centralized access points or companies, which can obscure the open nature of these transfers and potentially lead to abuse of the system.

DeFi is a network of open-source apps based on blockchain that allow users to engage in financial acts in an entirely peer-created, peer-reviewed, open-source world, which is all based on the security of blockchain.

Because everything within the DeFi crypto universe is open source, users theoretically have the control to engage in a wide variety of financial transactions with the assurance provided by the underlying blockchain technology.

How Can Decentralized Finance Be Used?

There are many ways that DeFi crypto is and could be used. One popular way that it is being used currently is with open lending protocols. While the name sounds complicated, open lending protocols essentially seek to eliminate the centralized middleman between lenders and borrowers.

For example, instead of one person putting their savings in a bank and another person applying for a loan from that bank, two people could use a DeFi open lending protocol to lend and borrow money with open-sourced, agreed-upon contracts created by the DeFi system and stored in unalterable public blockchains.

DeFi can also be used for things like international and peer-to-peer payments. Currently, if one person wants to send money to another person, options may be limited to a third-party service or a bank in order to transfer the funds. Currently, these services take time—it may be hours or even days between when a sender transfers money and when someone else receives it.

Additionally, these services can be expensive. Whether paying a fee to a bank for a money transfer or paying to use wire services, sending money from place to place can add up.

DeFi is one possible answer to routing money from person to person because it allows individual people to transfer money to each other securely and instantly without relying on centralized third-party providers.

Getting Started With DeFi and Cryptocurrencies

DeFi is starting to take off, but it remains to be seen whether it will truly become an alternative to traditional banking. One sure thing, however, is that cryptocurrencies are becoming cemented in the financial system. An easy way to buy cryptocurrencies without needing to be a financial expert is with SoFi Invest®.

SoFi Invest® empowers members to trade stocks, ETFs, and even cryptocurrency. SoFi’s crypto offerings currently include Bitcoin, Etherium, and Litecoin, and can be accessed directly in the SoFi app.

Easily add cryptocurrencies to your savings plan with SoFi Invest® along with traditional investments like stocks and ETFs. A separate cryptocurrency wallet, or even cryptocurrency experience, is not necessary before getting started.

SoFi Invest®
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Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.