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The Real Power of Health Insurance

As business owners, we tend to view health insurance as a nice perk to offer employees. But it's not a perk. It's a requirement for anyone choosing to go it alone as an entrepreneur.

One thing that people--and I'm one of them--seem to forget when it comes to moaning about the escalating cost of health insurance is that we're buying a safety net.

Other types of insurance help rebuild a house after a fire or buy a new car when the old one is demolished. But something strange happens to our interpretation of insurance when it comes to healthcare: We use it to pay for medical visits to deal with runny noses. This is akin to billing your auto insurance to fix a radiator hose.

That's Gotta Hurt
Average annual per-family premiums:

2002: $8,003

2012: $15,745


Source: Kaiser Family Foundation/Health
Research & Educational Trust 2012 Employer Health Benefits Survey

Case in point: For me, each spring brings seasonal allergies, along with my annual trip to the doctor and the reminder of just how expensive healthcare is. Under the terms of my plan, I was on the hook for $918.82 for this year's visit--$250.50 for the appointment, $530 for the allergist to stick a fiber-optic cable up my nose and $138.32 to pick up a prescription for a nasal spray.

Why so expensive? Because I'm single and self-employed, I've opted for a high-deductible, low-premium plan with minimal benefits.

I was discussing the insanity of this situation with another self-employed colleague who, strangely, wasn't joining in my misery. I asked him why. "It's called insurance for a reason," he said. And then he went on to explain how after losing his job a little over a year ago, the first thing he did was decline paying for health insurance through COBRA and sign his family up for a $7,000 Health Savings Account (HSA) that cut his monthly premiums in half. The way HSAs work, you pay out of pocket for everything until you use up your account within a year (in this case, the $7,000). But after that, the insurance company picks up 100 percent of every medical bill for all the people on the plan.

Two months after signing up, his wife was hospitalized while on a business trip out of state. A month later, she endured another trip to the ER, then inpatient surgery. The bills started coming in, more than $132,000 worth. My friend was on the hook for the first $7,000 (because he was unemployed, he had to borrow money to pay for it). But that's all he had to pay for his wife's treatment--and his family's doctor visits for the rest of the year.

"I can't argue whether or not my wife's care was worth $132,000," he says, "but she's healthy, and I didn't lose my house in the process, and I was able to get my own business successfully off the ground without having to sweat paying for medical bills."

His story caused me to reset my view of my own crappy insurance plan. I was reminded that I didn't buy it to deal with my allergies--I bought it to save me from economic ruin.

As business owners, we tend to view health insurance as a nice perk to offer employees. But it's not a perk. It's a requirement for anyone choosing to go it alone as an entrepreneur. In fact, I'd say lining up personal health insurance in whatever form you can afford should be your first step.

J.D. Roth is the founder and editor of the personal finance blog getrichslowly.org and the author of Your Money: The Missing Manual.

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This article was originally published in the June 2013 print edition of Entrepreneur with the headline: Close Calls.

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