Is There a Penalty for Cancelling Health Insurance?
Health insurance is a vital necessity for individuals and families due to unpredictable health situations that often arise. It provides access to medical care when you receive certain diagnoses, which can be expensive without insurance. However, life happens, and you might find yourself in a position where you need to cancel your insurance policy. In this article, we explore the penalty for cancelling health insurance and everything you need to know before making such an important decision.
Understanding the Consequences: The Penalty for Cancelling Health Insurance
What is the penalty?
The Affordable Care Act (ACA), also known as Obamacare, requires everyone to have health insurance. The idea behind the law was to create a pool of healthy individuals to offset the costs of providing coverage to the sick individuals. Under the ACA, if an individual fails to maintain their health insurance coverage (either by canceling it or choosing not to purchase a policy), they must pay a penalty on their tax return. The penalty is often called the Individual Mandate.
When does the penalty apply?
The penalty applies if you do not have health insurance and do not qualify for an exemption. However, people who lose their insurance coverage due to a qualifying life event do not have to pay the penalty if they promptly enroll in a new policy.
How is the penalty calculated?
The penalty for not having insurance coverage is calculated in two ways: as a percentage of your household income or as a fixed dollar amount. The capped penalty amount is the national average premium for the lowest-cost individual plan that qualifies as minimum essential coverage. Individuals will have to pay whichever of the two amounts is more significant. The penalty amount may change every year due to factors like inflation rates.
Who is exempt from the penalty?
Some individuals are exempt from paying the penalty for not having health insurance. They include:
- People for whom the available insurance premiums after any applicable employer contributions consumption exceed 8.05% of their household income
- Individuals with income below the filing threshold for federal income tax returns
- American Indians and Alaska Natives who are members of federally recognized tribes
- People who qualify for a hardship exemption because of specific circumstances that make it difficult or impossible to obtain health insurance coverage
- People who experience a short gap in coverage that lasts less than three months during the year
The High Cost of Opting Out: Exploring the Penalties for No Health Insurance Coverage
What is the penalty for not having health insurance?
The penalty for not having health insurance is calculated annually based on the person’s income. It is either the quoted annual rate or the percentage of the total household income, whichever is greater. For the tax year 2019, the minimum penalty is $0, but there are still penalties for being uninsured in certain states.
How does the penalty compare to the cost of health insurance premiums?
For most people, the penalty for not having health insurance coverage is much more significant than the cost of insurance premiums, which is another reason to maintain health insurance coverage. In many cases, penalty costs double what premiums would be for individuals who decline coverage and pay out-of-pocket for medical expenses. Also, the penalty is nonrefundable, whereas you get the financial benefit from insurance premiums as you pay for medical care.
What are the long-term financial implications of not having health insurance?
The majority of individuals without health insurance coverage face severe financial consequences. A major diagnosis or unexpected emergency has the potential to drain a family’s savings account and put them in financial turmoil for years to come. In extreme cases, people without insurance may have to declare bankruptcy or face lifelong debt.
To Cancel or Not to Cancel? Examining the Penalties for Dropping Your Health Insurance Plan
Reasons why people might consider cancelling their health insurance
Cancelling health insurance could be advantageous for individuals who want to reduce their monthly expenses. However, there is a trade-off; if you are not insured, you will have to face the entire medical bill if you go to the hospital or need surgery.
Individuals might consider cancelling their health insurance if:
- They have experienced a significant change in their financial situation, such as losing their job, and can no longer afford the premiums
- They are having difficulty using their current coverage and are considering switching plans
- They want to switch to a different doctor or hospital that is not in their network
Potential penalties for cancelling health insurance
Cancelling your health insurance policy can cost you heavily. You may face a minimum penalty of $695, or 2.5% of your household income, whichever is higher, for the tax year 2020. The penalty applies for every month you went without coverage, which means that the amount accrued can be devastating for a longer period.
Alternatives to cancelling health insurance
There are some alternatives to cancelling your health insurance rather than going completely uninsured:
- Eliminate the coverage components that you no longer need. For instance, if you don’t plan on becoming pregnant in the near future, consider removing maternity coverage.
- Enroll in a lower-cost health insurance plan with a higher deductible that will provide coverage for unexpected emergencies or unexpected illnesses.
- Consider looking into government programs that offer free or low-cost health insurance coverage for individuals who qualify based on their income, such as Medicaid or Children’s Health Insurance Program (CHIP).
- Explore short-term health insurance to bridge gaps in coverage, but make sure that you understand the benefits and drawbacks of short-term insurance before purchasing it.
Unpacking the Fine Print: What You Need to Know about the Penalty for Cancelling Health Insurance
Details about the penalty that people may not be aware of
It’s essential to understand that the penalty amount will rise every year, which makes cancelling health insurance a costly decision. Additionally, the penalties for not upholding the Affordable Care Act mandate can show up in various ways that include tax liens or wage garnishments, which is something that people may not know.
How to avoid the penalty
The only way to avoid paying the penalty for not having health insurance is to qualify for an exemption or have a policy that provides minimum essential coverage.
Is It Worth the Risk? Weighing the Pros and Cons of Cancelling Your Health Insurance
Pros of cancelling health insurance
- Reduced monthly expenses and more cash in-hand to pay off other debts or expenses
- Choosing your doctor or healthcare provider without restrictions that networks sometimes impose
Cons of cancelling health insurance
- Increased potential debt if a medical emergency occurs
- Potentially owing a tax penalty for not having health insurance
Factors to consider before making a decision
Before cancelling health insurance, it’s crucial to consider some factors, which include:
- Finances: If insurance premiums are becoming unaffordable, consider exploring alternative health benefit strategies like Health Savings Accounts (HSAs).
- Medical History: Take into consideration any existing or prior health issues that require ongoing treatment or medical intervention.
- Employment: If your employer offers group healthcare benefits, review the cost share and compare it to the costs of an individual policy once the monthly pay is deducted.
- Risk Assessment: Consider if you have adequate savings to cover out-of-pocket medical expenses if you decide to drop your health insurance coverage.
Thinking About Cancelling Your Health Insurance? Here’s a Look at the Penalties You Could Face.
Real-life examples of people who faced penalties for cancelling health insurance
The Potential penalties for canceling health insurance are considerable, as seen in the following examples:
- A single person earning $50,000 annually and does not purchase health insurance will have to pay a penalty of $1,250, which is 2.5% of his or her income.
- A family of four, comprising two adults and two children, earning $80,000 annually will pay a penalty of $2,085, which is 2.5% of their total income.
Tips for avoiding the penalty
- File for an exemption using Form 8965 when filing your yearly tax return.
- Ensure that you maintain coverage for the entire year; otherwise, you may be hit with a tax penalty for every month that you are not covered by health insurance.
Conclusion and final thoughts
Before canceling your health insurance coverage, it’s essential to understand the potential penalties that might incur, which is quite hefty. You may be better off reducing your monthly premiums or looking for alternative health benefits to save on your healthcare expenses. Finally, research different options before cancelling your health insurance coverage, and if you have any doubts, consider consulting insurance professionals and healthcare advisors to navigate your health insurance options.
