> Taking the Next Step
There's never been a better time to be your own boss. Really. But the freelance life does present some challenges on the benefits and insurance front.
While the days of full-time 9-5 jobs aren't going away anytime soon, the freelance business is establishing a notable foothold in the U.S. In 2005, the number of people who had "alternate work arrangements" — which is to say freelancers, contract workers and the like — stood at 10.1 percent. By the end of last year, they made up 15.8 percent of the nation's workforce, according to a joint study from Princeton and Harvard universities.1
Whether you call it freelancing, a sole proprietorship or a one-person LLC, self-employment allows for flexibility in your schedule, gives you more control over the assignments you take and puts you firmly in charge of your own destiny. But it's not without risks. The U.S. Government Accountability Office found that contingent workers earn about 10.6 percent less per hour than standard workers and are less likely to have benefits like health insurance and retirement plans.2
"Most of the people who talk about self employment only see the good things and get disillusioned with how difficult it actually is," said Kevin Cackler, a full time freelance web developer and systems administrator since 2003. "Most people don't understand that their employer pays half of their employees' taxes. Most people don't understand that most employers pay part of their employees' insurance premiums. Most people don't understand that when it's your business, you can only rely on yourself. Self employment isn't for most people. It's extremely rewarding if you can pull it off and maintain it, but it can be a terrible mistake if you're unprepared for the downsides of it."
With so many people opting to strike out on their own, though, some professional groups — like the New York State Bar Association and the Public Relations Society of America — are setting up systems to make it a little easier for the entrepreneurial-minded, offering group health insurance and, in some cases, retirement funds. Similarly, the Freelancer's Union has arranged health, dental, disability and liability insurances (among others) for members. And the popular workforce management service WorkMarket offers health insurance options as well, via insurance broker Stride (the service that's also used by Uber and Etsy).
Long-time freelancers, though, say that while it's nice to have those as a backstop, the smartest thing to do is to find a good financial professional and consult with them first.
"A great insurance broker is worth their weight in gold," said Cherie Gary, a marketing and public relations professional, in an interview.
Gary said she has put that financial professional to good use in her 15 years as a freelancer — and never so much as in the past few years with the advent of the Affordable Care Act. Initially, she says, she had a typical preferred provider organization (PPO) health plan. This year, she was forced to move to an HMO, due to policy changes from her insurer. And she recently got a notice from her health insurance provider that they will no longer be selling insurance on the ACA marketplace in her home state of Texas (and several others).
"For the first time, health care is becoming a real challenge," she said.
Part of that challenge comes from the fact that while there are a lot of freelancers out there, they (by their very definition) address insurers as individuals. That hurts their bargaining power, since single policy accounts don’t have the volume group accounts can wield to win discounts.
That doesn't mean freelancers don't have options, though. If you're thinking of striking out on your own (or have already done so), here are a few things to consider…
Health insurance: The best plan for you, of course, varies per person, based on their health needs and those of any dependants they might have. Many freelancers have spouses who still work full time jobs — and take advantage of any health insurance offerings offered by those companies.
Solo insurance policies for individuals and families are expensive. There's no getting around that. You can mitigate the costs by raising your deductible if you rarely get sick or don't have kids, but keep in mind that by doing so you could be hit with high expenses if you do have to be hospitalized or have surgery.
Of course, there's also the possibility of discounted health insurance through the Affordable Care Act's Health Insurance Marketplace if you meet income qualification levels.
Dental insurance: Stand alone dental plans can be pricey, but you can often find fairly affordable dental coverage as a supplement to your health insurance, depending on your carrier. If not, a Dental Plus plan might be worth investigating. These plans, which charge upwards of $25 per month for basic coverage (including two cleanings per year), are not technically insurance — and won't cover certain issues — but can save you money and are widely accepted around the country.
Disability Income Insurance: Often overlooked, this can be a critical insurance for the self-employed, since if you're too sick or injured to work, you quickly will begin cutting into your rainy day fund. And if you're out for a long time, that belt-tightening can quickly become severe financial troubles. Unfortunately, there aren't a lot of ways to dramatically cut the costs of this form of insurance. Check with your financial professional to see if there are options to it more affordable. (Calculator: How a Disability Would Affect Your Finances).
Retirement savings: Corporate matching becomes a thing of the past once you strike out on your own, so it's even more important to save for your golden years. But between the bite of quarterly taxes and day to day expenses, it's a bigger mental hurdle to put money away. A Simplified Employee Pension Plan (SEP plan) lets you put away up to 25 percent of your income or $53,000 per year (in 2015 and 2016).3
Life Insurance: Protecting your spouse and children in the event of your untimely demise is never a bad idea, but it's particularly important if you don't have the backing of a corporate life insurance policy. Many freelancers opt for term life insurance policies, since they tend to be less expensive (and every penny counts when you're paying unsubsidized rates), but first make sure that's the best choice for you. Professional organizations, like the ones mentioned above, can help cut the cost a bit, though your policy choices will be limited. Life insurance might seem less important as you plan out your expenses, but if you've got dependents, it's a good protection against the worst-case scenario.
Other insurance considerations: Depending on your profession, there could be other insurance that's wise to consider. If your work is public-facing, for instance, liability insurance might be a good idea. If you collect credit card information, cyber-security insurance, which limits your liability in case of a data breach, is worth thinking about. And don't forget to pay special attention to your homeowners and auto insurance, since both serve as your office on a regular basis these days. Check with your provider(s) to ensure your coverage is sufficient.
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1 Princeton University et al., "The Rise and Nature of Alternative Work Arrangements in the United States, 1995-2015," March 29, 2016.
2 GAO, "Contingent Workforce: Size, Characteristics, Earnings, and Benefits," April 20, 2015.
3 Internal Revenue Service,” SEP Contribution Limits,” June 13, 2016.