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Health insurance options for the self-employed

In the popularity contest of employee benefits, health care coverage is queen. However, for the self-employed, the cost of health insurance can be a royal pain.

An estimated 40 percent of small-business owners do without insurance, according to the Insurance Information Institute in New York, because they falsely believe they can't afford it.

Never fear, o solo one.

"It doesn't have to be as difficult as it is made out to be," says Dana Barfield, CLU, CHFC, a financial consultant for small businesses and owner of The Barfield Group in Dallas.

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"The first thing independent professionals have is a greater amount of control," he explains. "They don't have to worry about a human resources department dictating their benefits. They're able to analyze their specific situation and tailor a plan to meet their specific needs. With enough time, an individual can set up a benefits plan far superior to any one from a company."

Ah, time. There's the rub. Other pressing matters, such as building up your business, can make it difficult to find that time to research appropriate and cost-effective health insurance. However, many self-employed people don't realize what's available, says Barfield.

When you gave up the grind of working for someone else, you gave up a lot of guarantees -- and, for the most part, you're better for it. The one sure thing you don't want to miss out on is being able to see a doctor and deal with medical emergencies. So, here's what's available:

Easy health insurance options
If you're planning to leave or recently have left full-time employment, you can take it with you -- your old insurance, that is.

COBRA: Its acronym comes from the Consolidated Omnibus Budget Reconciliation Act of 1985, and it can provide a bridge for the self-employed. COBRA limits you to the insurance you had before and lasts only 18 months.

As a former employee using COBRA, you have to pay the full premium that your employer was previously paying or supplementing. That is still cheaper than an individual policy, since the coverage is purchased at a group rate. When it expires, you have the choice to continue with that same plan -- at an individual rate. That was the choice made by Judy King, 42, a contract computer programmer in Pompano Beach, Fla.

"I had an insurance broker looking for carriers who work with my preferred physicians," she explains, "but I ended up staying with my original carrier because I knew them. They're a big company that I don't think will fold on me."

Your employed spouse: A common and easy way to get health coverage for longer term is to rely on your employed spouse.

"Many times it's the best way," says Terri Lonier, CEO of Working Solo Inc., a San Francisco strategy consulting firm for entrepreneurs. "It's the least expensive and most streamlined."

She credits the rise of self-employment to the rise in two-income households. One spouse can guarantee a paycheck and benefits, while the other goes independent.

Individual policies: Independent professionals who don't have the above shortcut options need to buy an individual policy. Luckily, the Internet has cleared these once-murky waters and comparison shopping is easier than ever.

"The Net has done a lot to enable self-employed people to check out competitive insurance rates," says Lonier. "One of the smartest things you can do is shop around. You may spend some time, but you could be saving a lot of money."

The cost of premiums varies greatly, depending on your age, medical history and the company. Call, ask questions, compare and then ask for a better deal.

Don Vaughan, a veteran freelance writer in Raleigh, N.C., and his wife, Nan, a self-employed nurse practitioner, are happy with their health insurance after investigating numerous plans.

"We just shopped around for our insurance, getting quotes and literature from the major providers and then deciding what worked best for us and was within our budget," he says. "We finally settled on a plan through Blue Cross/Blue Shield that met our needs and didn't break our bank account."

When shopping around, look for an A-plus rating by A.M. Best, the insurance rating firm. A better rating gives you more assurance that the company will actually pay a claim.

How to cut premiums, save money
Before you start your research, consider these premium-lowering measures.

  • Always protect against the worst.

If you're relatively healthy or have a strong enough cash flow to handle routine medical expenses, consider purchasing "catastrophic" insurance.

"A high-deductible insurance policy will keep you out of the poorhouse if something goes wrong," suggests Peter McCann, president of Aquent Insurance Brokerage Services in Boston, which delivers insurance products to independent professionals.

When money was tight a few years ago, just such a catastrophic policy took care of the needs of Jerry Shaw, a rental property owner in Fort Pierce, Fla.

"I was more interested in insurance for security purposes," he explains. "So I got health insurance with low premiums and a high deductible. This meant I paid for the basic stuff, but was protected in case anything serious happened. Now I have more money to spend, so I have a better plan -- it took care of 100 percent of a recent surgery -- with a higher premium, but still not too bad."

A high-deductible insurance policy can also be paired with a Medical Savings Account to take care of the routine expenses.

  • Know your needs.

Choose the best insurance policy for you. A fee-for-service plan will give you the most choice and flexibility in your health care and a choice of doctors, but you'll pay for it dearly. An HMO will give you a lower price, with reduced options. You can get comprehensive coverage without too many out-of-pocket expenses.

Also, don't immediately replace all the health insurance plans you had as a full-time employee. Consider going without some specialty types of insurance, such as dental or vision, if you don't need them.

For example, if you don't wear glasses or contact lenses, spending a couple hundred a year on vision insurance is a waste of money. Tailor your insurance plan to your health needs.

  • Be a joiner.

Just as when you were an employee, you can find strength in numbers. You may be able to find an affordable policy at a group rate discount through a trade association, professional organization, a reputable small-business association or your local Chamber of Commerce.

This is the way most single self-employed people tackle the financial challenge of health insurance, says Working Solo's Lonier. Before joining a group just for its health insurance plan, weigh in the cost of membership with the insurance premium.

  • Get under an umbrella.

Imagine remaining independent, but putting all that Human Resources hullabaloo into the hands of someone else. For a fee or percentage, there are many companies willing to oblige (as well as handle billing and other back office tasks). By joining a talent agency, a recruitment firm or a network of free agents, you can have the non-salary benefits of full-time employment while continuing to develop your own business.

Before going this route, be clear what obligation you would be under with an organization. Find out how and how much you'll pay for the pleasure of buying into this group's benefits. In other words, continue to be a smart consumer.

  • Work part time

A part-time job with benefits -- if you can find one -- can solve the problem of acquiring health insurance. However, consider the time that it will cut into your main career and time, warns McCann.

  • Don't forget those other oft-forgotten insurances

Taking a look beyond the sniffles and a potential broken leg -- don't forget two other important types of insurance that many full-time employees take for granted: life and disability. Life insurance is most important if you have someone counting on your income. Disability insurance is of the utmost importance when you consider that your business has one major asset -- a healthy and working you.

Don't slack off now
Once you've chosen a plan for you, don't go back to that old taking-for-granted mode. Check your policies and premiums at least once a year; make sure they are still meeting your needs.

While you're at it, keep informed about changes in the small-business benefits arena. Organizations such as Working Today and the National Association for the Self-Employed are building networks and lobbying Congress to improve access to better health and retirement plans for independent professionals.

"As more people are becoming self-employed," suggests Lonier, "more options are appearing."

 

-- Updated: August. 15, 2001

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