Why You Need a Health Emergency Fund

A health emergency, an emergency room visit, or a long illness can set you back financially if you are not prepared. Learn how to set up a health savings fund to cover things your health insurance might not.

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

HSAs were established in 2004. If you are protected 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. A health savings account (HSA) is one way you can put aside tax-free money for a health emergency.

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“An emergency fund is about more than just out-of-pocket medical expenses. If possible, it’s a good idea to have both.” 

"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.

How Much of an Emergency Fund Do You Need?

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. 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.

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 kind of medical bills might arise that you would be responsible for? What are your insurance limits? 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:

Emergency room cost. One study found that HMOs in California denied one out of every six claims for emergency room costs. 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.

Cost of illness. Looking forward, however, the new health care reform law will eliminate caps on lifetime insurance by 2014. 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.

Surgical coverage. . 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. 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

How to Save for a Health Emergency

"Money that you put aside for a health emergency needs to be liquid and secure," says Porco. "That means you need to be able to get it when you need it.” Once you know what your insurance actually covers and how much you need to put away for an emergency, the next question is where to put it.

And your money needs to remain liquid. “Those who fail to set up an emergency fund may find themselves running up credit card debts to cover their expenses. The last thing you need is to be paying interest on your emergency," warns Porco.

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Practical Ways to Save

There are many different ways to approach starting — and adding to — your health emergency savings. "You can take advantage of a health savings account if this is offered at your job, but start a general emergency fund also," suggests Porco.

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