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How much will health insurance cost when I'm an independent financial advisor?

TransitionsSean Kernan2 Comments

Today, I'd like to talk about a topic that is very important, expensive, and emotional for many people and has a big impact on some of the discussions that you might make around going independent. That topic is health insurance.

As we know, there have been a lot of changes in the last five or six years around health insurance in the United States. It has been a big policy topic of discussion and gets a lot of attention, and there is a lot of emotion around the politics of health insurance, so there are a lot of factors at play. And I think it's a question that many people have as they're looking to go from an employee advisor to an independent advisor or at least considering the option.

So let me first say that I think it's very important and critical, and I don't think I would ever advocate for someone to go without health insurance even if you are single, healthy, and young. I think the need for some sort of at least catastrophic plan is still there. So unlike life insurance that you might be able to do without in that scenario, I think having some health insurance regardless of your situation is critical.

The second point - like I said, it's expensive so there is no way around that, but I think I'll give you some detail beyond that. For most advisors, at least those that are solo, health insurance is probably number three after staffing and office space. And for some of us, it might be number two or number one since you can do without staff or office space if you want to or need to, but like I said, I don't think you can do without health insurance.

So with that, here is the good news and the bad news. The bad news I've already touched on. Health insurance is expensive and it's still expensive as an independent advisor.

The good news is that it's not that much more expensive as an independent versus an employee. However, let me qualify that, the insurance cost does not change whether or not you're independent. What changes is who is paying those costs. So that is something we will dive into a little bit, and it is much like your office space or assistant. Those costs are there. Just because you don't write the check, doesn't mean you don't incur them. And that concept, that principle is one of the major reasons that you see a huge payout difference between the top gross payout number as an independent advisor versus what you see as an employee.

Your employer is doing the math for you, telling you they will take care of everything, and they are paying your assistant, your office space, your payroll taxes and your health insurance (or at least a part of it). And they are giving you, theoretically, what's left over. For more info on advisor payout differences when independent, check out my previous post by clicking HERE

But, as I would argue, they are doing the math for you at a steep cost. So they're taking their profit margin on top of that. The point there is the cost of insurance is high and has been going up for many years, both for independent advisors and employee advisors. The only difference is who's paying the cost. But the main point is working as an employee does not make the insurance cheaper. It just hides the cost from you as an employee.

But as you have probably experienced, the employers have been less and less willing to cover those costs as they get hit with the increases over the last few years.

So the first topic I want to touch on as you look at the options of going independent or versus remaining as an employee, is one you want to make sure you look at what you are actually paying. You're going to need to pull out the numbers and look at your policy in terms of what it covers or doesn't cover. That's a big issue. You want to be comparing apples to apples.

COBRA Insurance

But let's make the assumption that you decide you want to go independent. One of the big things that you may not be aware, of and I wasn't until I made the change, was the availability of COBRA which is essentially the continuation of benefits (which is what the COB stands for. I think RA is reconciliation act).

But basically, you can continue your existing policy exactly as it is, but you will then incur the full cost versus having the subsidy you may have through your employer. Now, your employer may not be subsidizing at all in which case you can continue the same policy with the same cost.

But COBRA is something to consider because there is some flexibility around it that is helpful. You know what you have and if you're using certain doctors or other providers, you can continue those without question up to 18 months. That's how long you can use the COBRA, at least that's my understanding.

You want to make sure you confirm all this depending on when you listen to this information as the laws obviously change. When I looked at the options, it actually made sense for me to use it. So I ended up using my big wirehouse firm's policy for another 18 months which is a nice, unexpected benefit, a surprise that I didn't know would be there until after I had left.

Again, one of the reasons I'm putting out this information are these are the kinds of things I would have liked to know that were available. It was lucky for me that it worked out, but definitely something to look at beforehand.

So COBRA is a potential option to look at. Something I didn't find out until after I was already off COBRA is, in most standard employee policies, you can't sign up your spouse or your kid without you signing up.

In the COBRA option, at least last I was familiar with this, you can sign up only certain members of the family. So if you think you're fairly healthy and you can do with your own individual plan that maybe just covers catastrophic, if something that really bad happens to you, but you have someone else that needs the more robust coverage at lower cost or low deductibles etc. You could have a have a husband, wife, kids etc. stay on the existing policy through COBRA.

So you can mix and match, essentially, is a really nice benefit of COBRA. You have about 30 days to make that decision after you leave, but that is something you'll want to consider as you are looking at the different options on how to be covered when you make a change.

The next piece I wanted to touch on are the different components of the costs of health insurance. I found that when I was an employee, I didn't really understand this stuff because one, I was younger. Two, I didn't have kids until about two and a half years before I went independent so that wasn't an issue. My wife was fairly healthy and she was also on her own policy as a teacher, so that didn't come into play. We had fairly nominal costs as employees because we were each on our own policies so didn't really pay attention.

So this is all things I've learned in comparing as I went independent and as we changed policies. As I record this, it has been a little over six years that I've come to learn more about health insurance. So different components are really important to think through, especially as you get to the point where I'd recommend you run the numbers and you really analyze the different outcomes because the emotional part of this, I think, is a big deal. So I will come back to that and tell a little story about my experience before I could get my wife's blessing to strike out on my own. The emotions, in her situation, were a big deal, and I want to make sure I honor that.

Components of Health Insurance: Premium

So components of cost – the first and most obvious that we a lot of times we'll focus on is the premium or the monthly cost. So that is basically what does it cost you month to month to have that policy in place. And that's a fixed cost and that comes out of your paycheck or you pay the premium, just like any insurance, whether you have a claim or not.

I won't say I'm super healthy, but I haven't had a lot of claims, almost none. I have been paying for health insurance since, in this case, for six years without any benefit from it. I just pay the money and if I get hurt or if I get very ill or very sick, that is why I have it. And I have it for peace of mind both for me and my family.

So the premium is fixed and so, as you analyze the numbers in terms of your potential total cost versus what you are paying now, this is the one fixed, known amount. So you look at what are you paying, what could you pay on various policies and what do you pay now. So that's easy to compare apples to apples. It's guaranteed to spend the money.

Components of Health Insurance: The Deductible

One of the next big variables is the deductible. So just like with any other insurance, you have a deductible where the insurance company doesn't kick in yet. Many of the old school policies as an employee, particularly a generation or two ago, there was no deductible and maybe there are still some now. But, in other words, from dollar one, your company was picking up the cost of you went to the doctor for allergies, and they pay the $87, whatever it costs for that.

So the deductible, as you probably know being in our business, the higher the deductible, the less the premium is going to be. So I have tended to run the numbers many, many times and I always felt like the highest deductible I could get was probably going to be the most beneficial because I want to be in a position financially (with being independent it makes it easier from an income standpoint) to be able to cover the deductible if I needed, if something really bad happens, but that drives the fixed monthly cost down.

So to give an example, I have a plan right now that has a $10,000 deductible so that's quite steep. Like I said before, basically, it only covers me if I get some terrible disease, am in a terrible accident or something very bad happens to me or someone in my family. But if something like that happens, that $10,000 will be the least of my problems. It'll be the health of me and my family that's the real issue.

So the deductible is a big lever in moving the monthly fixed cost up and down. So even with that high deductible, like I said, health insurance is expensive. It has run me for six years now, somewhere between $500 and $600 a month for a family of four or at least four years of those six I've had two kiddos. My son's four now. So we are talking $6,000 to $7,000 a year for the privilege of paying more money if someone gets really sick. So again, it's expensive in case I didn't mention that. But it's important.

The deductible is a big variable. And again, if you don't like the idea of having these costs spike if someone gets sick, then you can pay more per month. But my feeling, and I've done the math, you're guaranteed to have that money go out the door. So, over time, with average or even below average health insurance situation, you're better off with a lower premium and a higher deductible.

Because again, the difference in the premium every month if you set that aside, escrowed it for yourself, you will have the month to pay the deductible if and when something happens. That's a financial planning technique you can use if you'd like. I think that makes the most sense.

Components of Health Insurance: Coinsurance

The next big component of cost is something called coinsurance. Coinsurance is a percentage of the costs, after your deductible that you pay. Basically, it's cost sharing. If I hit my deductible and now the insurance company is starting to pay, they may not pay 100% depending on the situation. This is another way they keep their costs down and manage their risk. A common coinsurance (which I have currently) is 20%. I pay 20% of the cost after the deductible. So what that means is I'm still on the hook but, instead of paying 100% of the costs, I am down to 20% of the costs.

It’s definitely something to look at because if that coinsurance number goes higher, obviously, you're on the hook for more after the deductible. Again, play with these numbers and think of what's the worst case scenario. And I like to assume that because you don't want to have insurance but still have a health event put you out of business (so to speak). If that's going to happen, you might as well not pay the monthly insurance.

You need to make sure that if you have insurance, a health event does not destroy your family finances forever. It might be a hit but again, hopefully you've picked up from me or elsewhere, that your net income is going be dramatically higher. Again, that's after all these costs we're talking about. So keep that in perspective. So that's coinsurance.

Components of Health Insurance: Max Out-of-pocket Cost

The last key component is the max out of pocket cost. So what that means is, after all is said and done, the coinsurance, the deductible, etc., what's the max that you are going to get hit with, basically capture liability? So I think it's also sometimes called stop loss just like we would use when we're talking about a trade, a stock, or an ETF.

That helps to make sure that you have a number that you cannot go above, in terms of your cost, in a given year. What I am trying to illustrate is - what is the financial impact of a really bad health event or events? I think the max, including the max out of pocket cost, is key because what that's the worst thing that can happen financially?

Again, that's how I would illustrate things when you're determining not only what is the financial impact, but then how does that compare to where you are as an employee. So one thing I left out in this illustration is the copays and that's because it doesn't add up to much from a dollar perspective. It may be annoying to have to pay $30, $60 and $200 bucks for various things but, in the big scheme of things, that's pocket change compared to what you'll make more as an independent. So if that is the only consideration or the biggest problem, then that's a great problem to have, but I don't think co-pays move the needle enough to warrant a lot of in-depth discussion.

So that's covered the big components of cost as you look at different policies and try to compare apples to apples. And, again, if you don't feel like you understand those terms very well, it's okay. I think most of us don't. If it doesn't affect us, we have no reason to really learn about it and that was certainly the case for me, until I started having a direct need and reason to look at it, I was fairly ignorant on those topics. 

Health Insurance - Crunching the Numbers

So let's do the numbers a little bit from a hypothetical standpoint. Again, I'm not a health insurance expert, and I'm not an attorney and these numbers are not necessarily representative. Past performance is no guarantee of future results etc. Your results may vary. Don't do this at home. You know, all the disclaimers that you can think of.  

Let's say I am paying $7,000 a year in annual premiums right now, which is probably a little high, but for round numbers, that makes sense. Let's say, for whatever reason, I have another $10,000 in a given year of expenses, which I don't. It might have been close to that the year we had our son, in 2011, and I was independent at that point. I knew that was coming, and I had prepared. I knew that was a "once in a lifetime expense.”

But let's say I have $10,000 a year in costs, which I don't, generally. And most people don't, even with all of those considerations, even if you have to pay out of pocket. An MRI is $1,400. We did that this year. It's no fun to pay that, but it doesn't add up fast and unless you're, again, having really bad things happen, really complex things happen, you learn to price shop more than the average person when you have these kinds of things or at least ask what things cost to make the decisions.

But let's say I have $10,000 a year in expenses, that's $17,000 a year in health insurance related expenses. I would guess that you may pay just as much or somewhere close, but let's assume you have a really good policy through a big firm and let's that would only cost you half as much. I'm going to guess that is a fairly accurate representation, but let's say you only pay $8,500 a year in health insurance expenses that come out of your paycheck.

Well, $8,500 a year, that's a lot of dollars, but divide that by your gross production and think of that as a payout differential. I am guessing if you compare that percentage differential to the difference between your gross payout as an independent versus what you're getting as an employee, the starting differential should be at least 40%.

So again, you can control what you spend if you are starting at a 40% difference. And if you have to give up...let's say you're doing $300,000 in production, that's 3% or less difference. So again, it is definitely a cost. I don't want to minimize it but, however, in relation to the difference in gross income before expenses, it's a very small piece. Again, you have a lot of other pieces that have to come out of that 40% differential office space, employees, marketing, paper, printer toner, etc., but I have other information you can find on those topics or we can discuss it. 

Bottom line is health insurance by itself, I don't think, is going to make or break the change for most of us. Even if, hypothetically, let's say for some reason you had a policy where you had no out of pocket costs for premiums or deductibles or copays, which I am not aware of any such plan for a true advisor where you have your own book. But let's say you paid nothing so that $17,000 is all incremental cost. Well, again, divide that by your gross production and figure out what percentage of your payout will that eat up in that scenario. Again, for me, right now that would be about 4%.

Do the math for yourself. You certainly want to see what the damage could be depending on the different policies you look at. And I can give you some resources or point you to places to start to compare numbers. But I am using $17,000 dollars a year as it would be a bad year, not the worst case scenario, but it would be pretty bad probably from a health and a financial standpoint. And it just doesn't move the needle from a payout difference enough, I think, to be the thing that stops you from making a change.

It takes some time and effort to analyze and see what the costs might be, but you have got to run the numbers. You also have to run them without the emotional impact of these numbers - if you are paying a big deductible, there are emotions are attached with something bad happening. Like I said, the perspective I'm trying to take in case something bad happens is that the money is the least of my worries. Certainly, I want to know what the impact financially would be - that's why I don't go without insurance because if you didn't care about the money, you'd probably just go without it, which probably ends badly for too many people. So that's not a good solution.

I had said I was going to mention this story. When I was looking closely at going independent, I was ready to do it in the summer of 2009. I was preparing and my wife got nervous. We had a two-year-old at the time. We had a plan to have at least one more child, which we did, but she was hung up on it. Her dad had worked for the United Way for 35 years and she was a teacher. She was used to the employee model of the world, and it was a big deal for her.

We actually had a friend of ours in the neighborhood that she knew well who I asked to come over and talk about it because she and her husband had their own business for several years. And they were pregnant with their second child, I believe. She came over to the house one night and basically communicated the message that you can still go to the doctor. You're not going to go bankrupt without having some huge company's health insurance plan, so that was very helpful. She was still nervous, but she trusted that between her friend and me doing the homework, we had covered it.

The idea of being on your own and not having this big company behind you with health insurance was a concern. And what I've learned about is the insurance company, again, they are offering the same kind of coverage to everybody. It's just the big company gets a price break because if there's 50,000 employees, they're going to get a better deal. That's the way it works.

I had a situation where one of my businesses set up a group plan where we received no price break because there's only 10 or 12 employees and no history in terms of claims experience. There's really been no benefit compared to an individual plan or almost none.

There are two resources which I think will be useful. One is ehealthinsurance.com. That's where I got my policy. That is where I've always price shopped and made comparisons.

The other big one is Healthcare.gov. When I got my policy, that wasn't around yet, and I've compared and contrasted and so far, it's made sense to keep my existing plan.

Really, you'll find if you look at those to websites or others, the pricing is going to be the same. The insurance companies are offering the same policies on the individual market. It doesn't matter if it's through Healthcare.gov or through ehealthinsurance.com or if you go directly to the insurance companies. Mine, for example, is through Golden Rule which is a subsidiary or brand name of United Health Care so it is not a rinky-dink outfit. It's a very large company.

Again, it’s different. For instance, when you go to the pharmacy, they say, "That will be $80." And they feel guilty, and you say, "Okay, no problem." You know you are going to pay a few extra bucks here and there. If you are not used to that and that scares you, you really want to think through that and prepare your spouse if necessary.

But the net benefit, I can tell you, is quite amazing from my perspective. Again, other information you want to look on howtogoindependent.com. You want to make sure it's going work for you in other ways. Again, I don't think health insurance is a show stopper that it might have been.

With Obamacare now, you have pre-existing conditions that must be covered and, therefore, you don't have the problem of not being able to get insurance. That has been an improvement where there could have been situations where people had to keep their employee insurance, not just because of cost, but access to insurance at all. So that has been a big deal. There's also cases where if someone is 64 years old, and they can wait until they turn 65 and go on Medicare, that's probably a good option. Maybe I'll do a separate conversation on when you should delay a move or not move and what the considerations would be.

Hope that answers a lot of the concerns and worries about health insurance. If you have any questions, let me know, and I'd be happy to answer them.