7 Dos and Don’ts for Freelancers Buying Health Insurance

When it comes to health insurance options for freelancers, a lot has changed in the past six years. Before the Affordable Care Act, workers without employer-subsidized health insurance were in a precarious position: Those with preexisting conditions often couldn't get coverage or had to pay more. And while healthy freelancers could sometimes find affordable choices, insurers were allowed to put annual or lifetime caps on their benefits or throw them off their plans over small technicalities.

Today, freelancers have many more protections, and many even qualify for a tax credit to subsidize the cost of coverage. But health insurance is still a huge expense for many self-employed workers. You'll need to understand how the system works, and what your best moves will be.

A few dos and don'ts for making smart coverage decisions:

DO learn the basics.

The Affordable Care Act requires that states either set up their own government-run marketplaces, also known as exchanges, or use the federal government's marketplace. These exchanges provide a platform on which private insurers can sell health plans — often known colloquially as "Obamacare plans" — to Americans who don't have coverage from somewhere else. You can find your state's marketplace online at Healthcare.gov.

The Affordable Care Act also created subsidies to help reduce the cost of insurance: Americans who fall below a certain income threshold can get a tax credit that will cover part of the cost of their Obamacare plan's premiums. Among those Americans with federal marketplace plans who received the tax credit in 2016, on average, the credit reduced their health insurance premiums by 73%.

As with other health insurance, it can be hard to compare the true costs of Obamacare plans in advance — partly because you don't know how healthy or sick you'll be over the course of a year, but also because you shell out money in different ways. First, there's your monthly premium, which gets you access to the insurance plan. Once you start going to the doctor or accessing other care, you'll also have to pay a preset out-of-pocket amount — your annual deductible — before the insurance actually kicks in. After you've spent your entire deductible, you'll probably have to pay either a set fee (your copay) or a fixed share of the cost (called coinsurance) for each service.

Fortunately, Obamacare plans get "metal" ratings that give you a sense of your potential out-of-pocket costs. "Platinum" plans are expected to pay for 90% of your out-of-pocket costs, "gold" plans should pay for 80%, "silver" plans should pay for 70%, and "bronze" plans should pay for 60%. For that reason, the most generous platinum plans typically have the highest monthly premiums, while the most bare-bones bronze plans have the lowest.

DON'T get paralyzed by sticker shock.

When freelancers see how much it will cost to insure themselves, some balk — especially if their most recent health insurance came from an employer. That's because people with traditional jobs typically pay far less than the actual cost of premiums. The average employee pays just $89 a month for single coverage, according to the Kaiser Family Foundation. But monthly premiums are actually $521, on average — it's just that the employer is paying the other $432.

For 2016, the average Obamacare plan on the federal marketplace cost $396 a month before tax credits, according to the Department of Health and Human Services (HHS). If you don't qualify for any tax credits — more on those in a minute — you could easily owe more than $4,700 a year for premiums alone. And insurers are allowed to charge older people up to three times more than younger people.

Still, don't let the cost scare you off. First of all, Americans who go without health insurance are now subject to a penalty at tax time if they don't qualify for an exemption. The exact penalty can vary based on your income and where you live, but the average estimated cost for 2016 is $969, according to the Kaiser Family Foundation. The wealthier you are, the more you could pay.

Second, that $1,000 penalty is nothing compared to what you could face if you undergo a medical crisis while uninsured. While the Affordable Care Act capped the amount of money insured Americans will ever be required to pay for in-network care — limits are $6,850 for an individual plan and $13,700 for a family plan — people without insurance have no such limit on their out-of-pocket costs. Uninsured Americans who suffer heart attacks or life-threatening accidents can easily owe tens or even hundreds of thousands of dollars in medical bills. The point of health insurance is not just to pay less when you go to the doctor, but to insure against those kinds of catastrophic losses.

DO get the subsidies you're entitled to.

The good news is that many Americans can get their premiums lowered if they know how to shop for insurance plans. That $396 average premium is before tax credits, but the average American with a federal marketplace plan is paying just $106 a month once the credits are factored in — not so much more than the average American with an employer plan.

And the credits cover many middle class families. If you earn less than 400% of the poverty level — that's $47,520 for individuals and $97,200 for a family of four in 2016 — you should qualify for the subsidy. To get the credit, you must buy a health plan available through your state's marketplace.

If you don't qualify for subsidies, you can find more insurance plans directly through the insurers' websites or through brokers like eHealth. These plans may offer better options than Obamacare plans, but they're priced accordingly. Many Obamacare plans keep costs down by limiting the network of doctors you're allowed to see, for instance. Compared with plans sold outside the government exchanges, Obamacare plans had 34% fewer health care providers like primary care physicians, hospitals and specialists, according to a 2015 study by Avalere. But a separate 2014 study by HealthPocket found that the most affordable Obamacare plans had 40% lower premiums than similar off-exchange plans. If you need to see certain specialists, you might want to splurge a bit on premiums to ensure you can keep your doctors.

DON'T cheap out with a short-term health plan.

One way some freelancers have been cutting their costs is by cobbling together a few short-term health plans, which typically offer monthly lower premiums ($110 a month, on average). According to eHealth, interest in short-term health insurance increased 134% after the Affordable Care Act was implemented.

However, short-term plans are not a substitute for traditional insurance. First, short-term plans don't have to meet the standards required by the Affordable Care Act, which means they can discriminate against people with preexisting conditions, refuse to cover services like preventive care and prescription drugs, and put annual or lifetime caps on benefits.

Also, since short-term plans don't meet Obamacare's standards, they aren't actually considered "insurance" — so you'll still have to pay the Obamacare tax penalty if you don't have other minimum essential coverage.

In light of these problems, HHS recently proposed new rules that would prevent Americans from remaining on short-term plans for longer than three months and require that insurers warn consumers about the fine print.

Since you might not be covered if you get really sick and you still must pay the tax penalty, only consider short-term plans if you've missed the deadline to get coverage and you don't qualify for a special enrollment period (more on that below). Otherwise, don't make short-term health plans part of your long-term strategy.

DO consider skimpier Obamacare coverage instead.

A better way to get premiums down: Opt for a higher deductible. The highest deductibles are on so-called catastrophic plans. If you do get sick, you will have to pay a lot more out-of-pocket — and you can't apply a tax credit to a catastrophic plan — but if you're relatively healthy, you can save a lot with lower monthly premiums.

Not everyone qualifies — you must be 30 years old or younger to get a catastrophic plan (or you must qualify for a hardship exemption). People on these plans can get three primary care visits and other preventive services for free. But aside from that, enrollees must pay $6,850 out-of-pocket before they hit their deductible and before insurance starts to cover other health care services.

Why would anyone choose such a skimpy plan? To save a ton on premiums. In Brooklyn, N.Y., for instance, a catastrophic plan is available from CareConnect for $175 a month — less than half the cost of the cheapest silver plan, according to a plan comparison list from the Freelancers Union. A smart move would be to put aside those monthly savings in an emergency fund or health savings account to cover emergency out-of-pocket costs.

If you're over 30 or want slightly better coverage, choose a bronze plan, which is expected to cover 60% of out-of-pocket costs. While most Americans with Obamacare choose silver plans because the tax credit is calculated based on the second-lowest cost silver plan in their area, you can also apply your tax credit to a bronze plan. Again, remember that you're risking higher out-of-pocket costs in return for lower monthly premiums.

DON'T miss the deadline.

If you don't yet have health insurance for 2016, it's probably too late. Now that insurers are no longer allowed to discriminate against people with preexisting conditions, there's just a limited window of time when you're allowed to enroll, to dissuade you from waiting to buy insurance until you are sick. Generally, you can only buy individual insurance during the open enrollment period. The last one ended on Jan. 31, 2016, and the open enrollment period for 2017 will be from Nov. 1, 2016 to Jan. 31, 2017.

There are a few exceptions. You may be able to sign up for health insurance before November if you experience what's called a "qualifying life event" — moving to another state, getting married, or having a baby. To take advantage, you'll need to apply for a special enrollment period on Healthcare.gov. Move quickly: In most cases, you only have 60 days after the qualifying life event to enroll.

DO plan for tax time.

The Obamacare tax credit is odd in that you get it in advance — instead of making you wait until you file your taxes and receive your refund, the credit lowers the amount you pay in health insurance premiums every month. But the subsidy you get is based, in large part, on how much you earn. When you enroll, you must provide an estimate of your income for the rest of the year. Then when you file your taxes, you must reconcile your estimated earnings with your actual earnings, to make sure you got the right amount for your tax credit.

Yet many freelancers have income that varies. If you overestimate your earnings, you'll get a bigger tax credit than you expected, and thus a bigger refund. But if you underestimate, you may need to return part of your tax credit at filing time.

This is a fairly common problem: Last year, H&R Block found that more than half of their taxpayers underestimated their income and needed to pay back a portion of their credit, $530 on average. If you make less than 400% of the poverty line, there's a cap on how much you could be forced to pay back — but you still want to be careful when estimating your income.

The good news? As a freelancer, you can deduct the cost of your health insurance premiums, even if your other deductible expenses don't exceed the standard deduction ($6,300 for individuals this year). Freelancers' health insurance premiums are a so-called above-the-line deduction, which lower your taxable income before other write-offs are applied. That should help during tax season.