With only a few days left in open enrollment, I'm seeing a lot of my friends on social media ask: "What is the best insurance for self-employed photographers?" If you live in the United States and are overwhelmed with the choices in private and market place insurance, let me give you a suggestion on one of the smartest types of insurance plans you can get for you and your family. Warning: this article is not exciting for photographers, but it could save you a lot of money in the long run.
First, let me say this up front: this article is not about politics or about what is right or wrong about health care in the United States. I have my own opinions about healthcare, but I simply want to share with you my approach to saving (and making) the most amount of money possible while still having coverage. Before I explain my strategy, let me explain why it's a good idea to have insurance in the first place. At the time of this published article, if you do not have health coverage in any given year, you will pay a pretty hefty tax penalty for the individual mandate.
In 2017, that penalty is $695 per adult and $347.50 per child, or 2.5 percent of your total household adjusted gross income up to a maximum of $2,085 (whichever is higher).
If you do the math, you could hypothetically get insurance for yourself at $300 a month, while the difference in being covered vs taking a fine might only be $1,600. In my opinion, as long as this penalty is in place, it usually makes sense to pony up and pay a monthly deductible and at least have coverage in the event of a catastrophic event. I did not have health insurance the first year the mandate was issued, and I know I paid way more in fees than the maximum mentioned above, so make sure you check the current laws because I'm sure the penalties will go up over time.
Also, more people file for bankruptcy because of health-related bills than any other type of financial burden. You may think you are perfectly healthy, and maybe you are, but unfortunate circumstances happen to the best of people during the best of times. All it takes is one negligent action from someone else to send you to the hospital. Medical bills are absolutely outrageous, and being caught without some sort of safety net is bound to bring you more heartache and financial trouble than you can imagine.
Buying Into a Health Savings Account (HSA)
My approach to health care at the moment is to pay as little as possible in monthly premiums and avoid the doctor as much as possible (fingers crossed). I'm also a firm believer in saving as much money as possible and letting your savings make gains and interest for you. I'm sure you know the saying: "let your money make you money." And I think this is a very important aspect to building wealth. While I was investigating different insurance plans, I discovered a few insurance options called high deductible health plans (HDHP). Most of these options have lower monthly premiums, but as a tradeoff, they also include higher than normal yearly deductibles. If average deductibles might be $1,500 per year, these plans can easily have deductibles ranging from $6,000 - $8,000 per year. However, a small percentage of these plans also have the option of opening one of the hidden jewels of investment accounts: the Health Savings Account.
A Health Savings Account (HSA) is basically a private investment account used to store money for healthcare expenses. For single individuals, you can deposit up to $3,350 per year into the account or up to $6,750 if you are married. The beauty of an HSA is this money is yours permanently, and you can accumulate a nice nest egg year after year. In contrast, many people might have an employer who offers a Flexible Spending Account (FSA), which is similar, but usually, the money does not get rolled over year after year. Money in an FSA typically has to be spent in a single tax year or else it is lost forever. Because of this, HSAs are typically more beneficial when compared to FSA accounts. Keep in mind with an HSA account, all your medical expenses can be paid with money in this account, and most of the time, those expenses paid also count towards your yearly deductible (over-the-counter drug purchases and in-office co-pays sometimes do not count towards your deductible).
Health Savings Accounts are a rare breed in that they are considered a "triple tax advantage." The first tax advantage with having an HSA is you can deduct the full amount against your gross income and not have to pay taxes on it. So, if you have a marginal tax rate of 33 percent, you can deposit $3,350 into your HSA and save yourself from having to pay $1,105.50 in taxes on that income. In this aspect, the HSA is kind of similar to a traditional IRA account. The second advantage to investing in an HSA is your earnings within the HSA are also not taxed. Once you have met the minimum required balance in your account, you can invest the rest of that money in a mutual fund and earn gains tax free. In this respect, an HSA is kind of similar to a ROTH IRA. The final and third tax advantage to a HSA is that you don't have to pay taxes on any of the money you spend on qualifying healthcare costs. This is also similar to the ROTH IRA, but instead of having to wait until the age of retirement, you can immediately start spending your HSA money on any bills and procedures approved by the IRS. Keep in mind, most medical bills are not tax deductible unless they exceed 10 percent of your gross adjusted income. An HSA makes all of your medical expenses essentially tax deductible.
- Contributions are tax deductible from your yearly income
- Earnings and interest are not taxable
- Money spent on qualifying medical expenses is not taxable
Now, there clearly are some things to consider before jumping in and buying a high-deductible health plan that qualifies for a HSA. The first and most obvious issue is that you will not get any sort of insurance relief until you pay your entire deductible. If you are the type of person who goes to the doctor for every little sickness and health scare, you will be paying completely out of pocket. If you are young, healthy, and do not visit the doctor often, a high-deductible health plan might make perfect sense, because you rarely if ever hit your deductible anyway.
However, if you suffer from chronic illness, have a spouse with medical issues, or have children who might need medical care more often than you, a high-deductible insurance plan might make it hard on the wallet as you will be paying out of pocket for a lot of your initial medical costs. In this case, it might be easier to pay a higher monthly premium and have a much lower deductible so that your insurance company will start covering your medical expenses halfway through the year.
Another disadvantage with high-deductible health plans is that each year, your premium can increase. If this increase is too great, at some point you might be paying the same amount in premiums as someone who has a much lower deductible. If you are not also taking advantage of the HSA, this quickly becomes extremely costly with little or no benefits compared to a normal low-deductible plan.
I know for me, 3 years ago, my high-deductible health plan was about $250 a month. Last year, it was $310 a month, and I just got my notice that my bill will be $340 a month for 2018. If you do the math here, I will have to spend $10,080 before any insurance picks up the costs of my medical bills ($4,080 in yearly premiums and a $6,000 deductible). For me personally, I am fairly young and healthy, and I know I can afford to spend $10k on bills in the event that something catastrophic and unforeseen happens to me. It's basically assurance that I'll be okay if shit hits the fan. In contrast, if your deductible was $1,500 per year, you could essentially spend up to $715 a month on your premium before the two health plans would equal out. Of course, this calculation isn't taking into account the benefits of the HSA I outlined above.
The final disadvantage of having a high-deductible health plan and investing in an HSA is that you cannot pull that money out in case of an emergency. Actually, you can pull that money out, but you will be taxed and fined for doing so. If you do not already have a nice emergency fund nest egg built up, it might be tempting to withdraw money from your HSA, which will cost you a lot in the end. Luckily, most Health Savings Accounts are managed through a separate bank (Wells Fargo, Optum, etc.), so in many cases, this money will be out of sight, out of mind, which makes it less tempting to use it for non-medical related expenses.
- HSAs are only eligible with a high-deductible health plan
- Premiums on HDHP usually increase each year and can become increasingly more expensive
- Any money taken out of an HSA for non-qualified expenses is subject to tax and fees
- At the moment, HSAs have a triple tax advantage, but laws could change and eliminate some of these benefits
Obviously, talking about insurance, taxes, and investments are not the most exciting topics a photographer wants to investigate. However, if you take the time to learn about the benefits some of these plans offer, you can really save quite a bit of money and also build quite a bit of wealth for retirement or in this case, for future health expenses. My strategy as someone in their mid-30s is to stay as healthy and active as possible while buying into a high-deductible health plan that offers me the long-term benefits of a Health Savings Account. This way, I can keep my monthly premiums low (that is an oxymoron) while reducing my tax burden and also taking advantage of a savings account that can grow tax-free. If you do wind up opening an HSA account, make sure you invest a decent percentage of that money into a mutual fund so you can gain income on the money you do not immediately need for medical bills. Having money sitting in an account that makes 0 percent interest or gains is not a wise place to store money.
If I do have to go to the hospital or visit a doctor, which will always happen from time to time, I simply ask the receptionist how much the out-of-pocket costs will be if I pay in cash and weigh that cost with the cost I will pay if I file it through insurance. American health insurance is ridiculous in that many times, the in-office fee for paying out-of-pocket is even less than the cost if I bill it through my insurance. I know with a high-deductible health plan, I will be paying 100 percent of that fee when my insurance sends me the bill in the mail (until I meet my $6,000 deductible), but if I want to apply those expenses to my underlying deductible, it might make sense to still bill through my insurance instead of paying less directly out of pocket. Regardless of what decision you make when it comes to insurance, make sure you weigh everything in advance, especially if you have a spouse, kids, or other dependents so that you can play the game as wisely as possible.