Audacious individuals aspire to work for themselves. As time goes on and through trial and error, they can eventually become self-employed. Before transitioning to this next career phase, the aspiring self-employed individual should consider what benefits they will forego once they separate from their employer or source of income.
Health Insurance may seem superfluous since people aren’t faced with costly health-related situations all the time. For anyone who is or aspires to be self-employed their ability to generate income is not assured and an infelicitous health issue could jeopardize or eliminate their ability to generate income. Access to health insurance can greatly reduce the burden of an ailment. There are some considerations self-employed individuals should be aware of, however, before selecting a coverage plan. The purpose of this article is to brief self-employed persons about facts on health coverage costs.
Health Insurance Options in the US
Every day presents a possibility for an event to occur that can affect an individual’s well-being. Whether it’s intentional or not most people recognize this risk. Health Insurance is a group plan that makes surgical and non-surgical procedures affordable for all members within the policy.
Here’s how it works:
Everyone in the group pays a price. This is known as an insurance premium. In the case of an emergency, the money the group has raised will cover the cost of a procedure. Several variables factor into the cost of the insurance, namely the cost of treatments, but not everyone will pay the same price within a given group. Some individuals are deemed more at risk— whether it is through medical records, their occupation, or lifestyle — than others. This will effectively raise their premium. Additionally, insurance premiums can be determined by a deductible amount an insurance holder wants to pay. In the case of most treatments, an insured individual will have to pay their deductible entirely before their insurance company pays for anything. For more general visits there may be an associated co-pay, which is an agreed-upon price insurance holders will pay their provider at the time of their visit.
There are three main forms of insurance individuals have access to:
- Traditional fee service plans are the most expensive overall but have a wider range of provider options. Health Maintenance Organizations and Preferred Provider Organizations both aim to lower the cost of co-pays but they differ in some ways.
- HMOs are more restrictive than PPOs because individuals with this plan have to see providers within the network or they must cover the entire cost themselves. There usually isn’t a deductible and some specialists require a Primary Care Physician’s referral.
- PPOs are on average more expensive than HMOs but there are fewer limitations on needing to select a PCP or seeing out-of-network providers without coverage.
There are a few ways to obtain health insurance in the United States such as:
- Using a parent’s insurance plan before the age of 26
- Through an employer or spouse’s employer
- Government programs
- Military specific insurance plans
- Temporary coverage from a former employer
Most of the listed ways to obtains insurance are restricted to employed individuals or government-sanctioned programs, but self-employed individuals are usually left on their own. Although health insurance isn’t inexpensive it’s wise to have it, particularly as a self-employed individual. There are ways to mitigate some of the costs too.
Health Insurance Deductions in the USA
There are standard deductions that most taxpayers have access to. A deduction, of potentially up to 100% of health insurance premiums, for self-employed individuals exists.
The Self-Employed Health Insurance Deduction is considered “above the line” which means that these are expenses deduced to calculate an individual’s adjusted gross income. There is not a dollar limit to these deductions, but they can only be reduced up to the amount made from self-employed endeavors and won’t work on net losses. The only requirements to have access to this deduction are that the individual self-employed, which includes contracting/freelancing, and that they are ineligible for an employer-sponsored plan, usually through a spouse or if that individual has a full-time position.
Eligibility for this deduction is determined monthly, so on in those months where the self-employed individual is eligible to receive insurance from an employer or spouse, they be able to write off their premiums.
An LLC can pay for the health insurance premiums. The owner can put the premium payment as a taxable contribution on their 1040 form. If the LLC is paying for the health coverage premiums, the employees can still claim the deduction they paid for premiums as well.
Benefit Packages & Health Savings Accounts
Benefits are a primary advantage employed workers receive from their employer. Self-employed individuals don’t have this advantage and while they do have to forgo their benefits-package they can control the amount of coverage they have.
Health Savings Accounts
Self-employed individuals can set up a Health Savings Account to save money on premiums and overall health care costs. Aforementioned, premiums and deductibles are interrelated, so HSAs require plans with a higher deductible, a minimum of $1,400 for individuals, like PPOs or similar plans. The funds in this account are deducted from payroll and will not be taken away if the fund isn’t used entirely by the end of a year.
Life insurance is valuable to have when a self-employed individual has dependents with the average American paying $26 per month in premiums. The two primary kinds of life insurance are term and whole life insurance. Term life insurance only lasts for a predetermined period, or until death, while whole life insurance is perpetual assuming the insured individual pays their premiums on time. Term life insurance is 5 to 15 times less expensive than whole life insurance, but depending on the needs of the individual whole insurance can be better suited than term life insurance.
Disability insurance provides a worker’s family with an income in the case of an accident that renders that employee unable to work. Similar to life insurance, disability insurance comes in short-term and long-term forms. Short-term disability insurance only lasts about 3 to 6 months while long-term disability insurance can last through retirement and replace up to 80% of an individual’s working income. Disabilities are not relegated to physical injuries but include ailments that can be difficult to predict or control as 90% of employees on disability insurance suffer from non-physical ailments.
Dental plans come in two variations, one being insurance and the other being benefits. Insurance dental plans account for the risk and individual has to experience some procedure and pays for those costs while benefit plans are more general in what they cover. Most dental plans will cover the following:
- 100% of preventative care twice a year (language varies across policies)
- 80% of basic procedures
- 50% of major procedures
Some treatment options, such as orthodontics, will require a rider or endorsement in addition to the insurance plan selected. Dental plans typically have lower maximums than other kinds of insurance, on average a PPO dental plan covers up to $1500, so insurance holders will have to pay for major procedures. Medicare does not cover dental insurance and Medicaid usually covers dental insurance for children.
Factoring in Vacation Time
In the beginning stages of a small business, the owner may not pay themselves much at all so the idea of paid time off seems difficult. The most crucial aspect of vacation days as a small business owner is the foresight to plan for time off because it can be easy to not acknowledge the need to take breaks from operating a business. Whether the owner plans to set up a fund or set specific holidays where they don’t operate, time off can promote a better work environment for any working individual.
Best Insurance Policies for Self-Employed Individuals
Self-employed individuals need the best value when deciding which insurance company to go with The main difference will be in the type of insurance a self-employed individual will be able to obtain whether that is through a group plan, which some states allow individuals to participate in, or individual plans. Individual plans differ from group plans in that the entire premium is covered by the insurance holder, but they will craft their plan to provide exactly the coverage they need for themselves and others.
The best plans for self-employed individuals are PPO, HMO, and High Deductible Health Plans. HMOs are the least expensive and good for self-employed individuals who are concerned about costs. PPOs offer more flexibility than HMOs, individuals can see specialists without a referral and there is limited out-of-network coverage. HDHPs allow individuals to have access to the health savings account which offers some tax benefits. The money is contributed pre-tax from income self-employed individuals generate. The funds in the account compound tax-free and can be withdrawn tax-free.
How to Afford Health Insurance while Self-Employed
In 2021 health insurance for the average American has fallen to $495 per month and this can still be a prohibitive expense especially for the burgeoning self-employed individual. Self-employed individuals should search on the Individual Health Insurance Marketplace to find insurance. Typically, there is an open-enrollment period where uninsured individuals can apply for insurance. The open- enrollment is usually from early November to the middle of December, but there are exceptions. Becoming self-employed is one of many circumstances where individuals can purchase or switch health care providers outside of the open enrollment period.
Medicaid is also an option for some self-employed individuals and even though the rules are fairly strict, regarding who qualifies and how those qualifications can be met, it may be an option for some self-employed individuals.
How do Small Business Owners Obtain Health Insurance?
Employment offers individuals the opportunity to monetize their skills and knowledge. Smaller companies can offer different benefits than larger companies can, but some may be concerned about what kind of insurance they will receive if they decide to work for a smaller company. Small Business Owners have access to several different benefits they can use to make their and their employee’s lives easier. One such is the Small Business Health Options Program (SHOP) which allows companies that employ 50 or fewer employees the capacity to offer health and/or dental insurance. This allows those companies to grant their employees the same 10 essential health benefits that larger companies receive as long as their employees make on average $50,000 or less. Employing just one person (cannot be an independent contractor, spouse, or business partner/owner) allows small business owners the ability to purchase group plans.
Is Health Insurance a Business Expense for Self-Employed Individuals?
Health Insurance can be a business expense for self-employed individuals provided they meet definite standards. After the Tax and Job Cuts Act was passed in December 2017, several small business write-offs were introduced and one of them pertained to health insurance premiums. To access this benefit, the small business employee must meet the following requirements:
- Be self-employed
- Ineligible to participate in spouse’s plan
- Pay for their own health insurance premiums
In the case of an individual’s spouse having insurance, they can be eligible for a write-off only if that insurance plan doesn’t cover spouses. In the case of the self-employed individual purchasing insurance for their spouse, they must file jointly to utilize the tax credit while on marketplace plans. If a self-employed individual believes they could benefit from this write off then they should fill out the Self-Employed Health Insurance Deduction Worksheet provided by the IRS.
Peace of Mind is Priceless for Self-Employed Individuals
In a world with very few certainties, those who aspire to be self-employed must look for the right health insurance options to meet their needs. While it is not as straightforward as employer insurance plans, there are options available for self-employed individuals looking for peace of mind. It’s not necessary to go without health insurance if you are self-employed. It just takes a little digging.