Beauty Unlocked
Overpaying for Insurance Affects Retirement, Study Shows
Jul
Insurance is supposed to protect your financial future, not quietly nibble it into crumbs. Yet many Americans may be paying more for coverage than their circumstances justify while contributing too little to retirement accounts. It is a costly combination: too much money goes toward today’s premiums, too little reaches a 401(k), and valuable employer matching contributions are left sitting on the table like the last doughnut at a meeting.
A frequently cited TIAA Institute study found a meaningful connection between health insurance choices and retirement saving behavior. Employees who selected unnecessarily expensive health plans were more likely to contribute nothing to voluntary retirement accounts, even when employer matching money was available.
The lesson is not that everyone should buy the cheapest insurance policy. A bargain-basement plan that leaves a family exposed to a six-figure medical bill is not a bargain. The more useful lesson is that insurance should match actual risks, expected expenses, available savings, and long-term financial goals. Paying for protection you are unlikely to use can be damaging, but so can cutting essential coverage merely to save a few dollars.
What the Insurance and Retirement Study Found
The TIAA Institute research, conducted by University of Virginia economists Leora Friedberg and Adam Leive, examined administrative records from a large public university. The data covered more than 17,000 employees and approximately 49,000 employee-year observations from 2014 through 2017.
Employees could choose among three health insurance options: high-, medium-, and lower-coverage plans. The lower-coverage option had a higher deductible but substantially lower premiums and an employer-funded Health Savings Account. Using actual insurance claims, premiums, deductibles, and out-of-pocket expenses, the researchers estimated how employees would have fared under each plan.
For almost all employees in that particular workplace, the lower-premium plan offered a better expected financial result under the researchers’ assumptions. Nevertheless, relatively few workers selected it.
The headline findings
Employees who did not choose the lower-coverage plan overpaid by nearly $1,700 per year on average. For about one-third of workers, the estimated mistake exceeded 3% of pretax salary.
The retirement consequences were equally noteworthy. Roughly one-third of employees made no voluntary retirement contribution and therefore missed available matching contributions. Workers who spent too much on their health plan were 23% more likely to forgo the employer match than employees who chose the lower-cost option.
Among workers making no voluntary retirement contributions, estimated insurance overpayments approached 4% of pretax salary. In other words, some employees already had enough money flowing out of their paychecks to establish a meaningful retirement contribution. It was simply traveling to the wrong destination.
An important limitation of the research
The study does not prove that every high-deductible plan is superior or that every comprehensive plan is wasteful. It examined one employer with a specific set of premiums, deductibles, matching formulas, and HSA contributions. A worker with expensive medications, frequent specialist visits, major planned surgery, or limited emergency savings may reasonably prefer richer coverage.
The findings are best understood as evidence of a broader behavioral problem: people often choose benefit options independently instead of treating health insurance, emergency savings, taxes, and retirement contributions as pieces of the same financial puzzle.
How Overpaying for Insurance Shrinks Retirement Savings
An extra insurance premium does more than reduce this month’s spending money. It also carries an opportunity costthe future value that money might have produced elsewhere.
Suppose a worker could reduce unnecessary premiums by $1,700 per year and invest the savings in a retirement account. If those annual contributions earned a hypothetical average return of 7% for 30 years, they could grow to approximately $160,600. Investment returns are never guaranteed, but the example demonstrates why seemingly modest payroll deductions matter.
Now assume the employer provides a 50% match on those contributions. The combined annual deposit would be $2,550, potentially growing to roughly $240,900 over the same period. That is an enormous difference created without a raise, a winning lottery ticket, or a sudden decision to live entirely on beans.
Employer matches amplify the damage
Employer matching contributions are part of an employee’s compensation package. Failing to contribute enough to obtain the full match is similar to declining part of a paycheck. The U.S. Department of Labor encourages workers to understand their matching formula and contribute enough to receive all available employer money when their budgets allow.
Missing one year of matching contributions is unfortunate. Missing them repeatedly can be far more expensive because early deposits have the longest time to compound. A dollar invested at age 30 generally has more growth potential than a dollar first invested at age 55.
Higher premiums create an automatic savings barrier
Health insurance premiums are usually deducted before the paycheck reaches a bank account. That makes them psychologically invisible. People notice that their take-home pay feels small, but they may not stop to compare the premium difference between available plans.
Retirement contributions work through the same payroll system. When excessive premiums claim the available room first, employees may feel they cannot afford even a modest 401(k) contribution. The decision is effectively made before the money becomes spendable.
The Problem Is Still Relevant Today
Although the TIAA research used data from 2014 through 2017, the tension between current health costs and future retirement security has not disappeared.
KFF’s 2025 Employer Health Benefits Survey reported that the average annual premium for employer-sponsored family coverage reached $26,993. Workers contributed an average of $6,850 toward that amount. Among covered workers whose plans included a general annual deductible, the average single-coverage deductible was $1,886.
Those averages do not mean every household is overpaying. They do show how large health insurance has become within employee compensation and family budgets. Choosing between two plans can involve thousands of dollars in annual premiums, employer HSA contributions, deductibles, copayments, and maximum out-of-pocket exposure.
The 2025 EBRI/Greenwald Retirement Confidence Survey found that 56% of workers believed health care costs were negatively affecting their ability to save for retirement. Yet only four in 10 had calculated how much they might need for health expenses or long-term care after leaving the workforce. Among retirees, 38% said health and dental expenses had been higher than expected.
Fidelity estimated that an individual retiring at age 65 in 2025 could spend an average of $172,500 on health care and medical expenses throughout retirement. EBRI’s updated projections also indicate that some couples using traditional Medicare with Medigap may need several hundred thousand dollars to have a high probability of covering premiums and other medical spending.
That creates an awkward financial comedy: workers may be overspending on health coverage today while simultaneously failing to accumulate enough for health expenses tomorrow.
How to Tell Whether You Are Overpaying
Comparing premiums alone is not sufficient. The plan with the lowest premium can become expensive after a medical event, while the plan with the highest premium may charge more than a healthy household is likely to recover through lower cost sharing.
Calculate total annual cost, not just the premium
For each health plan, compare:
- Your annual payroll premiums
- The deductible and out-of-pocket maximum
- Copayments and coinsurance
- Employer HSA or HRA contributions
- Prescription drug coverage and formularies
- Provider networks and out-of-network rules
- Expected medical services for the coming year
A useful basic calculation is annual premiums plus expected out-of-pocket expenses minus employer account contributions. Then examine a bad-year scenario using the plan’s out-of-pocket maximum. Insurance exists partly to protect against unpleasant surprises, so evaluating only the average year is not enough.
Review previous medical spending carefully
Past claims are not a crystal ball, but they offer a reasonable starting point. Look at recurring prescriptions, therapy, specialist care, planned procedures, pregnancy-related needs, and ongoing treatment for chronic conditions.
A healthy household with substantial emergency savings may benefit from an HSA-qualified plan. A household expecting surgery or expensive medication may find a higher-premium plan more economical. The answer depends on the entire cost structure rather than whether the policy brochure uses comforting words such as “premium,” “gold,” or “platinum.”
Check whether an HSA fits your strategy
Eligible workers covered by a qualifying high-deductible health plan may contribute to an HSA. IRS rules provide several advantages: eligible contributions may be deductible or excluded from income, earnings can accumulate tax-free, and withdrawals for qualified medical expenses may also be tax-free. The account is portable and remains with the owner after changing jobs or leaving the workforce.
An HSA can therefore serve two purposes: paying current medical bills and accumulating funds for future health expenses. However, a high-deductible plan is not automatically suitable for someone who lacks enough cash to handle the deductible.
Insurance Reviews Should Extend Beyond Health Coverage
Health plans receive much of the attention because they are closely connected to payroll decisions, but unnecessary spending can hide in other policies too.
Auto and homeowners insurance
Rates can change even when a customer’s circumstances do not. The Consumer Financial Protection Bureau recommends obtaining written homeowners insurance quotes from multiple companies and comparing both cost and coverage. Changing deductibles can affect premiums, but a higher deductible should be supported by an adequate emergency fund.
Bundling policies may save money, although it should not be accepted without comparison. A “bundle discount” is not magical if both policies were overpriced before being tied together with a decorative ribbon.
Life insurance
Life insurance needs evolve. Young parents may require substantial protection, while an older household with grown children, no mortgage, and sufficient assets may need less. Conversely, canceling a policy without reviewing survivor income needs, debts, taxes, and final expenses can create a serious gap.
The National Association of Insurance Commissioners recommends reviewing life insurance periodically and revisiting coverage after marriage, divorce, a birth, adoption, death, or job change. Consumers should understand benefits, riders, premium schedules, cash values, and surrender consequences before making changes.
Duplicate and outdated coverage
Common sources of waste include duplicate roadside assistance, overlapping travel protection, warranties that repeat credit card benefits, coverage for possessions no longer owned, and riders purchased years ago for needs that have disappeared.
Mortgage insurance may also deserve review when home equity has increased, although cancellation rules depend on the loan. Consumers should contact their loan servicer rather than simply stopping payment.
A Practical Plan for Redirecting Insurance Savings
- Gather every policy and benefit statement. Include health, life, auto, homeowners, renters, disability, umbrella, and supplemental coverage.
- Record the annual cost. Monthly premiums can make expensive policies look harmless. Multiply them by 12.
- Identify the risk each policy covers. If two policies protect against the same event, determine whether both are necessary.
- Compare alternatives with equivalent coverage. A cheaper quote is not comparable if it excludes important benefits.
- Protect the employer match. Determine the minimum retirement contribution required to receive the full match.
- Redirect savings automatically. Increase the 401(k), 403(b), IRA, or HSA contribution immediately after reducing a premium. Otherwise, the savings may mysteriously turn into takeout and streaming subscriptions.
- Repeat the review annually. Insurance rates, health needs, family circumstances, property values, and retirement goals change.
When Paying More for Insurance Is Sensible
Reducing insurance should never become a contest to see how cheaply a household can remain one accident away from disaster. Higher premiums may be justified when they protect against a loss the household cannot absorb.
Richer health coverage may make sense for someone with predictable medical expenses. Strong disability insurance may be essential for a worker whose future income is the family’s largest asset. Umbrella liability coverage can protect accumulated wealth. Long-term care coverage or another care-funding strategy may be valuable for households concerned about extended assistance later in life.
The goal is efficient protection, not minimal protection. Good insurance planning transfers risks that could derail retirement while allowing manageable expenses to be handled through savings.
Experience-Based Lessons: How Insurance Choices Play Out
The following are illustrative composite experiences based on common benefit decisions. They are not descriptions of specific study participants.
Experience 1: The comfortable plan that quietly cost a match
Consider Elena, a 34-year-old employee who automatically selected the most expensive health plan when she joined her company. Her reasoning was understandable: the premium plan had the lowest deductible, and low deductibles sound reassuring. She renewed it every year without comparing alternatives.
Elena was generally healthy, took no regular medication, and had used little medical care during the previous three years. Her employer’s lower-premium plan also included an HSA contribution. After comparing annual premiums, expected expenses, and the maximum possible cost in a difficult year, she concluded that the lower-premium option was appropriate for her risk tolerance.
The change freed approximately $140 per month. Instead of letting that money dissolve into ordinary spending, she raised her 401(k) contribution through payroll. The new contribution was enough to capture more of her employer match. Her lifestyle did not change, but the destination of the money did. The experience illustrates the central finding of the TIAA research: benefit dollars can often be shifted from unnecessary premiums to retirement savings without requiring additional income.
Experience 2: The cheapest policy created a different problem
Now consider Daniel, who became enthusiastic about lowering every insurance bill at once. He raised his auto and homeowners deductibles, selected the lowest-premium health plan, and canceled supplemental coverage. On paper, he saved several thousand dollars a year.
Unfortunately, Daniel redirected only a small portion of the savings to an emergency fund. When a vehicle accident and home repair occurred within the same year, he faced two large deductibles. He used a retirement-plan loan to cover the bills.
Daniel’s mistake was not choosing lower-cost policies. It was accepting more risk without building the cash reserve needed to carry that risk. Lower premiums and higher deductibles can work well when the premium savings are intentionally divided between retirement investments and liquid emergency savings. Without that second step, a cost-cutting strategy can push a household back into its retirement account when life becomes inconvenientas life enjoys doing.
Experience 3: A retirement-bound couple discovers coverage clutter
Imagine Robert and Mei, both approaching retirement. Over several decades, they had accumulated multiple small life insurance policies, roadside assistance through two separate providers, an old vehicle with coverage based on its former value, and several optional riders they no longer understood.
They resisted canceling anything because each policy felt like a layer of safety. During an annual review, however, they separated essential protection from coverage clutter. They retained strong homeowners liability protection and an umbrella policy because those policies guarded their accumulated assets. They also kept life insurance needed for survivor income during the early retirement years.
At the same time, they eliminated duplicate roadside benefits, adjusted auto coverage to reflect the vehicle’s current value, and allowed one outdated life policy to expire only after confirming that the remaining death benefit met their needs. They directed the annual savings into a dedicated account for Medicare premiums, dental care, and other retirement health costs.
Their experience demonstrates why insurance reviews are not merely cancellation exercises. A thoughtful review may reduce some policies, preserve others, and occasionally reveal that important protection is missing. The objective is to make every premium defend a real financial risk.
Conclusion: Make Insurance and Retirement Decisions Together
The study connecting insurance overpayments with retirement undersaving exposes a weakness in the way many workplace benefits are presented. Employees are often asked to choose health insurance during one enrollment process and set retirement contributions somewhere else. Yet both decisions compete for the same paycheck.
An unnecessary premium can reduce current cash flow, eliminate an affordable 401(k) contribution, sacrifice employer matching money, and erase decades of potential compound growth. At the same time, inadequate insurance can force a household to raid retirement savings after a medical crisis, disability, accident, or lawsuit.
The balanced approach is to review coverage regularly, calculate total costs, preserve protection against financially destructive events, and automatically redirect genuine savings toward long-term goals. Insurance should serve retirement securitynot become the well-dressed pickpocket quietly walking away with it.
Note: This article is for general educational purposes and does not constitute individualized financial, tax, medical, legal, or insurance advice. Policy terms, tax rules, employer benefits, health needs, and risk tolerances vary. Review important changes with qualified professionals before replacing or canceling coverage.
