Sick Savings – Thinking About Health Insurance

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Health insurance is one of the key benefits that employees look for on a job. So much so that one of the considerations that a professional faces when thinking of when going self-employed is whether health insurance will be available and how much it will cost.
Thanks to the 1996 Health Information Portability and Accountability Act (HIPAA) your ability to get insurance when changing jobs or becoming self-employed is protected (as long as you follow all the rules and requirements) – a great improvement from before that when the inability to obtain new insurance if you had any significant health problems could effectively trap you in a job.

Even so, once you’re self employed you will have to pay for your own individual health insurance, or do without. But there two approaches to buying that insurance that you should be aware of. Let’s run some numbers.

Let’s look at family plans for the sake of argument, with a household income of $100,000 and annual medical expenses of $3000 + $750 dental (so it’s a fairly healthy family, as this would be the cost of routine exams and an illness or two). Let’s say the family is in the 20% tax bracket.

Wanting the most protection, you get a traditional $1000 deductible PPO plan for $750/month for a family. From a tax point of view, your premiums are tax deductible (remember, we’re talking about self-employed now). However, your insurance deductible and dental costs won’t be – because you can only deduct those expenses if they exceed 7.5% of your adjusted gross income, which won’t be the case in this example. To get your own personalized health insurance quote follow the link.

So, the after tax costs of this plan will be as follows:

$7200 premiums ($9000 after tax)
$2250 direct costs ($1000 deductible + 20% of next $2500 + $750 dental).
That’s $8950

So how about this alternative? Consider an HSA compatible plan – that’s a high deductible plan that works in conjunction with a Health Savings Account. The example from Blue Cross has a $3500 deductible and costs $192/month (big difference). The Health savings account is a special bank account into which you can contribute each year an amount equal to your deductible, in this case $3500 – before taxes (just like an IRA). Plus, any unused money stays in the account for future years!

The after tax costs of this plan are as follows:

$1843 ($2304 after tax)
$2800 ($3500 after tax – that includes $500 of the dental cost)
$250 (the rest of the dental)
That’s $4893 – nearly $4000 less.

Note some of the cool features of the HSA (Health Savings Account) plan – you can pay dental costs from the fund even if you don’t have dental coverage. Buying some over the counter cold medicine or aspirin? You can pay for those out of the HSA account also. Pretty much any medical expense allowed by the IRS qualifies and can effectively become tax deductible.

Of course figuring out your situation isn’t that simple. Different plans have different types of coverage (for example, the HSA plan shown here doesn’t include maternity care). But bottom line – for many people an HSA plan can save a LOT of money.

Also remember, even the highest deductible plan still gains you the benefit of the prices negotiated by the insurance company. So a diagnostic test that might cost an uninsured person $500 might cost you $75 even if you haven’t met your deductible yet (I know it sounds a bit crazy and unfair, but nobody ever said this stuff makes sense).