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I intend to run my side business full time soon and was wondering whether it would be prudent to continue to be a contractor for my current employer rather than become a full time employee after my graduation?

The main focus of this question is on health insurance were I am afraid of paying thousands to continue under my employers plan (cobra) if I was to become a full time employee and then quit to chase my own dreams.

On the other hand, if I were to stay as a contractor and get my own insurance, as I do now, I would continue to pay the very same premium for me and my wife that I currently do, out of my pocket, and not suffer "change in policy".

My main confusion is over something I term "change in policy" where:

  • my company would have subscribed me for Insurer A, Plan B
  • and when I quit the company, I could choose to continue paying the full premium for that policy for upto 6 months (cobra)
  • or get my own policy which would surely be a different policy even if I went with "Insurer A, Plan B" (since my company plan is a group plan and mine would be a family plan)

By changing policies so, I am afraid that the health insurance company could deny a lot of my claims citing that I have to be on the same policy for X years before they pay for those situations, or cite a "break in coverage" clause and turn down an expensive claim.

I have also heard that new health insurance plans tend to be more expensive than if you already were with the insurance company for a while?

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Who forces you to give up your current policy if you become employed? –  littleadv Dec 29 '12 at 3:38
    
BTW: becoming a (full-time) employee will cut in half your FICA liabilities. That's re your other question. –  littleadv Dec 29 '12 at 4:01
    
@littleadv: The new employer will not pay me the money they would otherwise need to pay to the insurance company for covering me. So in essence, I "loose" the amount of my compensation by not electing to be part of the company plan. Enrolling in the company plan would require me to pay part of the premiums as well which I cannot write off. Being a contractor, I can. Being a FTE, I would then end up paying for my family plan post tax and take an essentially reduced salary. –  sekharan Dec 29 '12 at 4:41
    
"which I cannot write off" - meaning? It is tax deductible, if that's what you mean, as opposed to a private policy (in fact, you pay pre-tax, and reduce your taxable income, so you don't even need to itemize deductions for this). Also, group insurance policies are generally better and cheaper than privately issued. I'm not sure I understand your concerns. Do elaborate some more on your assumptions, it seems that many of them are incorrect and without knowing what you think you know its hard to help you. –  littleadv Dec 29 '12 at 4:45
    
This SO kind of QA format is confusing - is there another board you are on that is more "conventional"? There are multiple assumptions in my question, all of which can be wrong. #1: Health providers can deny you claims if you were with another provider or different policy even with the same provider. Claims like pregnancy, autoimmune disorder etc #2: COBRA is not fun and is much more expensive than a private policy with same features (from what I read, even on this forum). It does make sense for group policy to be cheaper, but why do people complain about COBRA premiums all the time –  sekharan Dec 29 '12 at 4:52
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1 Answer

There are several assumptions you made, that don't match the current laws:

  • Preexisting conditions, are no longer a thing to worry about. When you stop your old policy they give you a Certificate Creditable coverage . The law only allows an exclusion of 12 months, but the certificate shows that you had coverage. As long as the coverage was for at least 12 months with the old plan(s), and the break was less than 62 days, you will be covered.
  • As the new laws go effect, there will be gap insurance for those that need it, and no preexisting conditions issues for children.

Costs:

  • In general group plans a cheaper, and the company generally pays for part of it. Your part will be pre-tax. You don't even have to itemize.
  • There are also ways to put aside money pre-tax to cover co-pays for doctor visits, and prescriptions.
  • Many companies offer several different plans depending on the coverage you need.
    • The cost of the group plans is negotiated by the employer, and the portion they pay of the premiums is a function of the employer. For large companies they actually self insure, the insurance company is a way to get access to groups of doctors, hospitals and pharmacies.
  • Some companies will allow a credit to employees that don't need the group plan. This can be because they are retired military, or they have coverage from their spouses plan.
  • As part of a group plan, they don't care how healthy you are, or how expensive your conditions are, they only care about the health of the group as a whole.

COBRA:

  • When you leave the company, if you find a cheaper plan, you can drop the COBRA.
  • Some families like to keep their current insurance, when they lose they job so that they also don't have to switch doctors.
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Hence, by definition COBRA plans will be cheaper than individually purchased family plans given the same coverage and health provider. Also, premiums I pay to my company for providing me and my family health insurance is deducted pretax from my paycheck? –  sekharan Dec 29 '12 at 7:04
    
@sekharan not "by definition", but due to the market conditions. With ACA provisions taking effect gradually, this might change sometime in the future. Re the premiums - yes, it is deducted pre-tax. –  littleadv Dec 29 '12 at 11:40
    
@sekharan If you are young COBRA plans will almost always be (much) more expensive than comparable individual coverage plans. If you are older they will be more competitive and possibly a better deal. –  stoj Dec 30 '12 at 14:04
    
@stoj: Makes sense. Maybe I should ask a separate question on COBRA, but define "young" keeping my married status into account (young women are more expensive to insure) –  sekharan Dec 30 '12 at 21:18
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