GPSOLO October/November 2007
Insurance Options for Small Firms and Solos: Protecting Yourself, Your Family, Your Practice, and Your Future
Health insurance is an important part of an overall personal risk protection plan for you, your family, and your employees. As a lawyer, you generally prepare for contingencies, and insurance helps you prepare for life’s contingencies. As a business owner, you want to have full protection for yourself, your family, your practice, and your future. Health insurance, although expensive in the United States, has become a near necessity for businesses; it can help you recruit and retain better employees, cap potential losses, and aid in providing better health care for you and your employees. Other considerations beyond health insurance for a full personal protection plan include disability income insurance to help protect an income, life insurance to benefit your family in case of a loss or for a business succession plan, and long-term care insurance to help preserve your assets.
Health Insurance Basics
With the advent of managed care, one of the main issues to consider is the type of plan you want. Or, how much freedom do you want in choosing the doctors you wish to see? Do you want a plan where you can only see doctors in the carrier’s network, or one where you can choose an in-network or out-of-network option?
Today, there are three basic types of health plans:
• in-network-only plans, consisting of health maintenance organizations (HMOs) or exclusive provider organizations (EPOs);
• in- and out-of-network plans, consisting of point-of-service (POS) plans and preferred provider organizations (PPOs); and
• full-indemnity or fee-for-service plans.
The major differences among all plans are cost and access; you may have to give up access to get low cost, or you can get high flexibility and access with a high cost. The bottom line: You get what you pay for. A brief overview of the basic options follows, but as you do your own research, you may find additional variations on these basic plans.
In-network only plans. HMO/EPO plans are typically the least expensive, but they are also the least flexible. They contain costs by allowing members to use only the services of a network’s contracted doctors and facilities. These plans are intended to cover the full spectrum of care within the network’s facilities and with the network doctors. If you want to see a doctor or visit a facility out of the network, you have to pay that provider’s full fees with no reimbursement or coverage from your plan.
HMOs focus on preventative care; generally you must choose a primary care physician (PCP), who will be responsible for coordinating your care and providing specialist referrals in network, all with a low copay per visit. EPOs, while still emphasizing preventative care, will allow you to visit any doctor within the network without referrals. EPOs typically have copays per visit and may or may not have deductibles.
As an additional benefit of managed care networks, carriers sometimes offer access to other health and wellness programs, such as discounted gym memberships, dieting programs, and smoking cessation programs.
In- and out-of-network plans. POS and PPO plans provide coverage for utilizing services with any doctor or facility in or out of network. Both plans typically cost more than an HMO/EPO plan because of the out-of-network benefit. When utilizing services within the network, you take advantage of the cost benefits of an HMO/EPO type of plan, such as the negotiated rates, copays, and membership programs. When utilizing the services of an out-of-network doctor or facility, you typically have to pay a deductible and co-insurance and submit for reimbursement, as in an indemnity plan.
As doctors grow their practices, some are opting out of participation in any network so that they are not beholden to a pre-negotiated rate for their services. A POS/PPO plan lets you access care from these providers while getting some coverage—typically in the form of reimbursement for services with deductibles and co-insurance.
Indemnity plans. Indemnity or fee-for-service plans offer you the most flexibility but are also the most expensive. You may see any doctor you want and submit bills for reimbursement. Indemnity plans feature a deductible and co-insurance amount for which you have to manage the paperwork to submit and get reimbursed for the services. Indemnity plans today are generally being replaced by variations of managed care plans and can be very costly.
The bottom line is that HMO/EPO plans and indemnity plans are at opposite sides of the health insurance spectrum, where POS and PPO plans fall somewhere between the two. Again, you get what you pay for.
Health savings accounts. With recent legislative changes, a cost-saving option that is gaining in popularity is the health savings account (HSA) coupled with a high-deductible health plan (HDHP). This option capitalizes on the goal of getting consumers to better manage their own care and expense, allowing for a lower monthly cost and more efficient use of services.
An HSA is a savings account established by an eligible individual to pay for the qualified medical expenses of the individual and dependents. HSAs are tax-advantaged vehicles for both the employer and employee. HSAs can be funded up to the annual maximum amount (in the year 2007, the maximum is $2,850 for individuals and $5,650 for families) and may be funded by the employer, employee, or both. Contributions to the HSA are tax deductible; income earned in the account grows tax free, and distributions for qualified medical expenses are also tax free (distributions for nonqualified medical expenses are taxable and generally subject to a 10 percent penalty). The employee owns the account, and if the funds are not utilized during the year, they roll over each year and can be used to pay for future eligible expenses.
In order to be eligible to open an HSA, the employee must be covered by a qualified high-deductible health plan (it could be an HMO, EPO, POS, or PPO plan); in 2007, the minimum deductible is $1,100 for individuals and $2,200 for families. Unlike basic managed care plans, however, all expenses in such plans, including pharmacy, are subject to the deductible with the exception of annual preventative care, which is typically covered at 100 percent. Out-of-pocket expenses may be higher than in traditional plans; however, a qualified HDHP has a maximum out-of-pocket exposure of $5,500 per single or $11,000 for families in 2007.
For a sole proprietor who is relatively young and healthy, this can be an interesting way to reduce overall health care costs and take control of health insurance concerns.
What to Consider When Purchasing
Firm size. Typically, health care pricing is broken down by size of company; because insurance companies can pool risk for a given group, the costs will be lower for larger groups. The most expensive health insurance plans are for individuals or sole proprietors; small groups with two to 50 employees are in the middle; large groups with 50 or more employees get the most aggressive pricing. Individual insurance plans are typically “underwritten” based on the individual; factors that can impact the cost include age, gender, and medical history.
Budget. How much do you have to spend and what kind of coverage do you want? If available budgets are low, you might want to consider an HMO or HSA with a high-deductible health plan. Are you covering yourself and employees, and how much is the company contributing per employee? Do you want in- and out-of-network options? Are there any medical issues or specific needs of those to be covered, or are they young and healthy? This will help determine if you need a plan that provides for more services or access.
Network strength. Health insurance is typically regionally based, and in each region some networks are stronger than others. If you’re participating in an in-network plan, you want to work with a carrier that has a strong network of doctors and facilities. Some carriers also have national networks, and this may be important if you or your employees travel a lot.
Professional employer organizations (PEOs) are a great way to outsource all your benefits, human resources, and payroll issues. PEOs co-op many small companies and offer large group rates (lower cost than small group rates) on health care and other benefits; they also facilitate compliance and other administrative issues and allow you to focus on growing your business. PEOs typically can offer a choice of health insurance plans at a lower cost than you would be able to get as a small business.
PEOs have pros and cons; they act as a co-employer with you and can alleviate many of the HR administrative responsibilities of running a business, but they do charge fees. If this is something you want to consider, talk to different companies, compare their fees, and weigh these against the costs and headaches of managing the HR, benefits, and payroll issues on your own.
Developing a Full-Protection Plan
In managing your practice, you need to prepare for contingencies. As indicated previously, health insurance is only one form of protection. As part of a full-risk protection plan, there are other forms of personal insurance you may want to consider.
Disability income insurance protection. Disability income insurance provides a monthly benefit if you become disabled owing to sickness or injury. If you are running your own business, you are the business. If you become disabled for an extended period and are not capable of working, the bills continue coming in, and the business needs to keep running. About one out of seven people between 35 and 65 can expect to become disabled for five years or longer (according to www.soundfinancialplan.com). A complete disability program can help protect you and the business; it can provide you with an income as well as provide for business overhead expenses. Disability income insurance is available as group coverage or as individual coverage; group coverage will be less expensive but will typically not provide as much coverage as an individual policy.
When looking at an individual disability income insurance policy, the benefit and the cost will be based on your occupation and your net taxable income for the last few years. Lawyers typically receive a high rating or one of the best occupation classes. You will want a non-cancellable and guaranteed renewable policy, coverage for at least 60 percent of your income (benefits are received tax free only if paid with personal funds), a benefit period to age 65, a waiting period no longer than your savings will keep you afloat (90 days is typical), and most importantly, you want a policy with “true own occupation coverage.” It is very important to read the definition of total disability in a policy; a “true own occupation” policy will pay benefits “if you are unable to perform the material and substantial duties of your own occupation owing to sickness or injury,” even if you are able to do some other kind of work. This kind of policy offers more protection, especially for lawyers who specialize in specific areas of law, because the monthly benefit will be paid if the disability prevents you from working in your own specialty even if you are able to work in another.
There are additional disability products to consider for your business. Overhead expense coverage could include benefits for typical business expenses and may even cover the cost of your temporary replacement if you are disabled. If you have a business partner, you may want to consider disability buyout coverage, and if you have a significant debt in the business, you may want to consider a business reducing term disability policy to cover the debt/loans. Not all companies offer all types of policies, so work with an insurance agent who knows the marketplace.
Life insurance. Life insurance is a basic protection tool that can help you meet many of your business goals while still protecting the financial security of your loved ones. If you own your practice and have a family, your family is reliant on the income from your business. If you were to pass away unexpectedly, then your family’s income would stop; the proper amount of life insurance will help the rest of your family to continue on and prosper.
When determining coverage amounts, you may want to consider your “human life value” (the same method that courts typically use to award judgments in wrongful death lawsuits). Human life value is defined as the present value of all future income that you could expect to earn for your family’s benefit, plus other value you expect to contribute, less taxes and personal consumption through your planned retirement date. It can be a complex formula, and a professional agent can help you determine proper coverage amounts. As a simple rule of thumb, however, a professional with a family may need ten to 20 times gross annual income in coverage (depending on age and assets).
As a business owner, you may have many other uses for life insurance. Issues to consider are the need to fund a buy/sell agreement if you have a partner, key man insurance, and the potential benefits of using permanent life insurance and its cash value for deferred compensation retirement programs.
Long-term care insurance. You or your spouse may someday need assistance with the basics of daily living. Long-term care insurance helps provide asset preservation and peace of mind; it protects your family and your retirement income from the consequences of living a long life and needing care. Long-term care can occur at home, in an assisted living facility, in a nursing home, or in the community through special programs, but no matter how or where it is provided, it can be very expensive.
Good financial planning is critical in preserving your independence, your assets, and your choices. Considering long-term care insurance is an important part of that process. As a business owner, the company can pay your long-term care insurance premiums (including those of your spouse or other dependents), and depending on the company structure and state you are in, you may receive tax deductions or tax credits; speak with your accountant for details. Long-term care insurance is something you will likely use later in life, but it might make sense to pay for this type of protection coverage in your peak earning years. Some companies offer policies allowing you to pay a higher premium for a set number of years with no further premiums due after that.
Finding the Right Plan
If you are an individual or sole proprietor looking for health care, you may want to consider contacting the stronger carriers in your region directly to discuss their options. Alternatively, local and regional bar associations and buying organizations sometimes offer health care plans for small businesses. The United States Federation of Small Businesses (www.usfsb.com) is a national organization specializing in health insurance plans for sole proprietors and small businesses.
The best way to put together a comprehensive protection plan and explore all the options for health care and other forms of protection is to work with an insurance agent, specifically one who specializes in financial services and benefits for small businesses or even focuses on working with lawyers. Ideally, you want an agent who handles health care and other personal planning issues. Ask around for referrals to a professional agent who can work with you to put together a comprehensive plan to help you protect yourself, your family, your practice, and your future.
Michael Korn is a financial representative of National Financial Network, LLC, in New York City. He was a small business owner before entering the financial services field several years ago. Now he specializes in working with small business owners and law firms, helping owners and senior management build, protect, and manage wealth. He may be reached at firstname.lastname@example.org or 646/885-2843.
Michael Korn, Registered Representative, Park Avenue Securities, LLC (PAS), 990 Stewart Ave., Ste 200, Garden City, NY 11530. Securities products and services are offered through PAS, (516) 745-5600. Financial Representative, Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect wholly owned subsidiary of The Guardian. National Financial Network is not an affiliate or subsidiary of PAS or Guardian. PAS is a member of NASD, SIPC.