Health Insurance Options for the Self-Employed

One of the biggest challenges of self-employment is obtaining affordable private health insurance. When you are employed at a company, that company’s group bargaining privileges allow for all insured employees to receive a lower premium. Once you strike out on your own, however, you lose that group bargaining advantage. Paying for private health insurance can take a big bite out of your income, especially if you are older or have preexisting health conditions.

Most self-employed individuals take one of five routes when attempting to find and pay for private health insurance. They either:

1. Risk having no health insurance.
2. Pay for COBRA-sponsored health insurance.
3. Pay for exorbitantly expensive private health insurance.
4. Obtain occupation-specific group health insurance.
5. Obtain an HSA (i.e., health savings account).

Self-Employed Health Insurance Options

No health insurance

Many folks, especially if they are young and single, risk going without health insurance coverage. However, in the event that they become sick or injured, the costs inherent in treatment a condition like cancer or a broken arm can be astronomical. Personally, I’ve witnessed at least two of my friends, both in their mid-30’s, be diagnosed with life-threatening illnesses while not covered under any health insurance plan. In the first case, the friend was diagnosed with breast cancer and ended up going into lifelong debt to pay for her chemotherapy. In the second case, the friend ended up with an $80,000 surgery bill, which was miraculously paid by the hospital’s charity fund.

The other issue with having no health insurance coverage is that you don’t benefit from routine check-ups that could end up saving your life. For example, many cancers can be cured if they are caught early. However, if you don’t get routine check-ups, you could end up paying with your life.

Pay for COBRA

If you recently became self-employed, you can remain on your old employer’s health insurance plan for up to 18 months via COBRA coverage. However, you must now pay up to 102% of the plan’s costs, which includes the amount that you and your employer paid for your health insurance, plus an additional 2% for administrative fees. This can be quite substantial since employers often pay the majority of their employees’ health insurance costs.

In my own case, I went from paying just $78/month for my individual health insurance plan to $456/month. Keep in mind that I had no preexisting conditions and had not visited my PCP in nearly five years. When I added my partner to the plan, my insurance premium skyrocketed to over $870/month! Obviously, the high price tag of COBRA coverage makes it unfeasible for many self-employed individuals and their families.

Things become even worse if you are disabled and are obtaining COBRA coverage under an 11 month disability extension (following the standard 18 month COBRA coverage term). In such a case, you could pay up to 150% of your former employer’s premium. This is simply insane.

Obtain private health insurance

Many of my self-employed friends and family members purchase their own private health insurance plans through big name insurance companies like Dean, Kaiser Permanente, AllState, etc. However, they all had to apply to several health insurance providers before being accepted into even a single program.

Those members that had preexisting health conditions like heart disease or diabetes were forced to pay extremely steep insurance premiums; for example, my uncle is in his early 60’s, has a history of high blood pressure, and pays about $1,000/month for his private health insurance plan. Likewise, your provider might raise your rates substantially if you make too many claims in a single year.

Obtain occupation-specific group health insurance

Although not as common as employer-sponsored group health insurance, some trades and guilds do offer occupation-specific group health insurance. In such cases, the premiums cost significantly less than those of private health insurance plans. For example, the members of the Freelancers Union collectively bargain with health insurance companies for a set member premium. Once you join the Freelancers Union, you reap the benefits of such membership.

Getting occupation-specific group health insurance is great; the problem is that it is not available to every profession or geographic location. Most of the available health insurance providers are centered in big cities like Chicago or New York. Unless you plan to drive many miles for your next health check-up or dental exam, occupation-specific group health insurance is not going to be possible for you.

Start a health savings account

The HSA, or health savings account, has become very popular in recent years as people try to find affordable health insurance for themselves and their families. An HSA is set up very much like a Flexible Spending Account, or FSA: You contribute pre-tax dollars into a separate bank account and then use that money for qualified health and medical expenses. Unlike the FSA, however, your contributed money does not expire at the end of the year. Thus, you are not subject to a “use-it-or-lose-it” policy with HSA monies.

On the contrary, you can even regard your HSA as another type of IRA, since it is likely that you will need to withdraw from your HSA as you become older. Unlike an IRA, however, you are not taxed upon withdrawing money from your HSA- as long as that money is used for qualified health and medical expenses. If you have the good fortune of not needing your HSA cash for health and medical expenses, you can still withdraw and use your money- provided you pay your taxes on it, of course.

HSA contributions can be quite substantial and really help you during tax time: For 2012, an individual can contribute as much as $3,100 into an HSA, while a family can contribute up to $6,250. If you are 55 years or older, you can add an additional $1,000 of “catch-up” money to your individual or family contribution. All this money is deductible from your gross income, allowing you to soften much of the taxman’s blow.

Before you start an HSA, you will first need to obtain a high deductible insurance plan. Many companies offer such plans, each with its own annual premium and deductible. Keep in mind that some deductibles can be as high as $2,000/year. Surprisingly, not all health insurance premiums will inversely correlate with deductible amounts, so it pays to compare individual insurance companies and find out exactly what they will (or will not) cover.

An HSA is not for everyone. If you require several drug prescriptions or are in poor health, the high deductible that you must pay before dipping into your HSA funds (which are still your own money) may make this coverage too expensive for you. Likewise, if you are considering becoming pregnant or have a preexisting medical condition, there could be a waiting period before maternity or other coverage begins. However, for many self-employed individuals and their families, having a tax-deductible HSA is a realistic solution to otherwise paying for highly priced private health insurance.