When you go independent, the rate you charge looks bigger than the salary you left behind. What nobody itemizes is the stack of insurance that stops the day you leave the payroll. Here is what disappears, what replaces it, and the tax break that makes one replacement cheaper than it looks.
What Ends the Day You Leave the Payroll
Four things go at once, and none of them sends a letter.
Group health coverage ends, usually at the end of your final month.
Group long-term disability ends. It is tied to the job, not to you, and it rarely converts to anything you can keep.
Group life insurance ends too. Most group policies give you about 31 days to convert to an individual policy with no medical questions. Almost nobody uses that window, because almost nobody knows it is open.
Workers' compensation stops applying. It covers employees, and you are not one. A sole proprietor with no employees is usually not required to carry it and is covered by nobody else's, though some states require it in trades like construction, and clients often ask for it by contract.
The loss is not the real problem. The timing of the discovery is. Nothing bills you when this coverage ends, so most people find out at claim time: after the injury, after the diagnosis, after a client's lawyer calls.
The Sixty-Day Window That Losing Coverage Opens
Losing job-based health coverage opens a special enrollment period on the marketplace at HealthCare.gov or your state's equivalent, and it lasts 60 days. You can also use it in the 60 days before coverage ends, which avoids a gap.
How you left does not matter. Quitting to freelance counts the same as being laid off. Dropping a plan you could have kept does not count, and neither does losing one over missed premiums.
Marketplace premium tax credits are calculated from the income you project for the coverage year, then reconciled against your real income when you file. Freelance income moves, so this bites harder for you than for a salaried worker. Project low and you repay part of the credit at tax time. Congress has repeatedly changed the size of these credits and who qualifies, so read the current year's rules.
If you have a spouse with a job, check that plan first. Your loss of coverage opens a window to join it, usually 30 days, and an employer paying most of a premium is hard to beat. Our article on health insurance at every stage of life covers the marketplace itself.
COBRA and What It Actually Costs
COBRA lets you keep your old employer's plan for up to 18 months after you leave. It applies to employers with 20 or more employees, and most states have their own continuation laws covering smaller ones.
Nothing about the plan changes. The bill does. At work you paid a slice of the premium and your employer quietly paid the rest, which is usually most of it. Under COBRA the whole premium is yours, and the plan may add up to 2% on top for administration. People call this a price increase. It is the first time they have seen the price.
One feature is worth knowing first. You get at least 60 days to elect COBRA, and coverage is retroactive to the day you lost it if you elect and pay back to that date. So you can sit out the window unpaid and elect only if something expensive happens. That is a real option and a nervous one, because an accident on day 61 is uninsured.
COBRA usually wins when you are partway through treatment and cannot change doctors, or when your deductible is nearly met. Otherwise a marketplace plan is cheaper.
The Health Insurance Deduction You Now Qualify For
Medical costs are normally hard to deduct. You have to itemize, and only the amount above 7.5% of your adjusted gross income counts, so for most people the answer is zero.
The self-employed health insurance deduction works differently. It is an adjustment to income, taken whether you itemize or not, and it covers premiums for you, your spouse and your dependents.
Three limits define it.
It cannot be larger than your net profit from the business. A year at a loss gets no deduction.
You cannot claim it for any month you were eligible for a subsidized employer plan, including a spouse's, even if you turned it down. The test runs month by month, so part of a year can still qualify.
It reduces income tax only. Self-employment tax, the 15.3% our article on job classification explains, is figured before this deduction comes out.
The Coverage Freelancers Skip and Then Need
Your ability to bill is the entire business now. Stop working and nothing arrives: no sick leave, no group disability, no workers' compensation. An individual disability policy is the only thing that replaces any of it.
Two things work differently than they did at work. The first is the definition of disabled. Own-occupation coverage pays when you cannot do your own job, any-occupation only when you cannot do any suitable job, and our disability insurance article compares them in full. For a freelancer whose income rests on one skill, that difference is the whole policy.
The second is underwriting. Insurers set your benefit from documented earnings, usually two or three years of tax returns, and for a sole proprietor that means net profit after expenses, not what clients paid you. Deductions that cut your taxable income also cut the benefit you qualify for. Many insurers want a couple of years of self-employment history first, so the easiest time to buy is often while you still hold the job.
Liability Coverage Clients Ask About Before They Sign
Two separate products, badly named.
General liability covers physical harm you cause to other people or their property. A client trips over your light stand. You knock a laptop off a desk at their office.
Professional liability, also called errors and omissions, covers financial harm caused by your work itself: a missed filing deadline, a bug that takes a store offline on its busiest day, copy that gets a client sued. General liability touches none of that, and that gap is the one most freelancers miss.
Larger clients often will not sign until you produce a certificate of insurance, a one-page document from your insurer confirming the policy and its limits. Many contracts also ask to be named as an additional insured, which extends your policy to claims made against them over your work.
Your Home Policy Does Not Cover Your Business
A homeowners or renters policy is written around personal life, and its business exclusions are quiet ones.
Business property carries a special limit far below your overall property coverage, commonly a couple of thousand dollars at home and less away from it. Two cameras and a laptop clear it. Business liability is excluded outright, so a client hurt in your home office is not a claim your policy pays. Our renters insurance article covers what those policies do handle.
The fixes are not expensive. Many insurers sell an endorsement adding limited business property and liability to a home policy, which fits a laptop-and-desk operation. Beyond that sits a business owner's policy, bundling general liability with coverage for your equipment. Ask your current insurer what your policy already excludes, because that answer decides which of the two you need.
