How to Afford Health Insurance with Irregular Income
If you’re self-employed or have irregular income from multiple jobs, health insurance is scary – if you buy it, you’ll have those darn monthly payments looming. But if you don’t buy it, what if something bad happens? Will you go bankrupt?
Stop fretting. We’re here to make the health insurance process simple, maybe even somewhat enjoyable, for those of you with irregular income.
Why do I need health insurance?
When you’re healthy, health insurance is an immediate cost that you don’t feel value from. But it’s those unexpected moments (like car accidents) that, unfortunately, have the potential to end your passion project, or worse, sink you into debt. You’ve built a business that provides a lively, flexible freelance lifestyle, so it’s your job to keep that lifestyle business financially safe.
The government is making it harder for you to go uninsured these days. Penalties for being uninsured are a lot more expensive in 2017 – the penalty will be the greater of either $695 (per adult family member and half that per child) or 2.5 percent of taxable income. For younger individuals and families, that penalty could rival the costs of being insured. And when you're insured, you can deduct your health insurance premiums from your income, thus lowering your taxable income.
How can I afford a good plan?
Estimate your income and explore subsidies
87% of health insurance shoppers qualify for subsidies, especially independent workers. First, you’ll need to know your approximate gross income from the past year. This number will help you not only understand how much you can spend towards health insurance but also allow you to approximate how much you can save with subsidies. Here’s how you can safely estimate this number:
Step 1: Calculate how much you earned each month last year. This includes all sources of income: freelance earnings, inheritance, stock dividends, etc.
Step 2: Next, measure the minimum you earned for the year by taking your lowest-earning month and multiplying it by 12.
Step 3: Don't forget deductions! If a large portion of your income is from 1099 work, like driving for Uber or freelancing, then you can deduct business expenses from that income estimate. For drivers in particular, deducting a hefty business expense like mileage can significantly lower your income estimate. Go ahead and estimate (based on previous months) your average monthly business expenses (for mileage calculate: monthly work mileage x .54 = deduction). Then subtract those monthly expenses (like mileage, home office, even health insurance premiums) from your monthly earnings.
For example, let's say Cindy drives for Uber full time. And the income she makes is 1099 and thus allows her to deduct business expenses from her estimate. In this case, Cindy will take her average gross monthly income from Uber: $4,000 a month and subtract one of her largest business expenses: mileage. Cindy drives 3,000 miles a month. So her deduction is 3,000 miles x .54 standard mileage deduction = $1,620. This means her monthly income estimate after deductions is $2,380. Cindy will use this number ($2,380) to project her annual income.
A lower income estimate means you qualify for more of a subsidy! So just like with your taxes, maximize and track those deductions to get a better deal on health insurance.
Step 4: Then sum up your total income for each column: actual earnings and minimum earnings after business expenses. Here’s an example:
As you can see from the example, the minimum annual income is what you’ll need to use when shopping for health insurance. With Stride’s health insurance platform, you can easily enter that number once you begin the plan recommendation process (we even have a tool to account for deductions as well).
Understand the subsidies you qualify for
Once you know your approximate minimum annual income, you can see what kind of subsidy you qualify for. There’s a good chance you’ll receive a nice discount or even a (near) free plan. Remember: 87% of enrollees in Affordable Care Act plans received financial assistance in 2016. Pro tip: if your income stream is very unpredictable and your 2016 income is an irrelevant estimate for 2017, underestimate your income for 2016. You’ll qualify for a larger subsidy, which you’ll only have to pay back if you have a great year.
Shop around for the right plan
Now that you know how much you expect to earn, you can begin comparison-shopping for different plans. Stride’s platform allows you to compare prices for different plans after subsidies have been accounted for. If you already have health insurance, open enrollment is also an opportunity to shop around for new or better plans. The prices for plans in most exchanges have fluctuated quite a bit. It’s highly possible you could find a better plan that’s cheaper than what you’ve paid in the past.
The plan you select makes a big difference in your out-of-pocket costs. For example, if you have a known medical issues (expect to be pregnant, have surgery, etc.) you shouldn't buy the cheapest plan, as your deductible – what you pay before your insurance starts kicking in – will be much higher. If the cheapest plan is all you can afford, take advantage of minute clinics and telehealth options to save money on non-emergency procedures.
Lastly, if you expect part of 2016 to be financially strong (i.e. you’re hoping to land a big contract but haven’t locked it in yet), consider an HSA-eligible plan. When you land that big contract you can put tax-free savings away to pay your medical expenses at a later date, like when that big contract ends and your income will be lower again.
OK, I picked my perfect health plan, now what?
All health care plans come with a lot of free stuff. Take advantage of all the free preventative care that comes with your plan. If you enroll in health insurance through Stride, we’ll build you an annual plan to take advantage of all the free care your plan allows.
How do I stay financially healthy year-round?
Set Your Income Targets: More precisely calculating your income and expenses will help you know more exactly how much you need to work per month. It will also enable you to more accurately set and defend your rates.
Consider contracts with longer terms: If you’re able to set contracts with clients, consider including longer terms in consulting agreements or freelance contracts in which you and the client commit to a minimum amount of work/income. For example, let’s say you’re a freelance writer. In your contract you could commit to a minimum number of articles per month for 2-3 months. You could work more if needed, but that minimum can provide a short financial safety net.
Establish a business checking or savings account for your freelance income: It’s a good practice to deposit your freelance income into a separate business account and then transfer money from that account to your personal one monthly or bi-monthly according to your target monthly income (that's already accounted for taxes and health insurance). Another way to think about it is bimonthly paychecks to yourself after taxes and health insurance costs have been subtracted.
Build an emergency fund: It’s a good idea to have at least 6 months of savings (for which you can cover your biggest expenses like rent and health insurance) set aside for a worst-case scenario in which you can’t work or projects dry up. Additionally, for months that you dip below your projection, you'll have a cushion, for months you earn above deposit that into your emergency fund.
Remember to track deductible expenses: Health insurance premiums are a huge deduction off of your 1099 taxes. Make sure you’re tracking and accounting for it along with other common write-offs like mileage and the home office deduction.
As always, if you have any questions or suggestions, we want to hear from you! You can contact firstname.lastname@example.org
Here’s to a financially and physically healthy 2017!