Best of, Credit Cards, Reviews

2017 Best Credit Cards for Small Businesses

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Note from the Editor: The information related to Chase Ink Business Preferred Card credit card has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this card.

 

As a small business owner you know you need to manage your cash flow and plan for financing. Credit cards can be an ideal way to meet those needs. But business owners need to be savvy cardholders. Small business credit cards come with unique risks that personally affect entrepreneurs.

 

In this roundup we cover the risks and advantages of small business credit cards. And we’ll show you what card fits your business needs.

 

Best Cards for Financing

If credit cards are an important source of financing and capital for your business, then you need to be a savvy borrower. Look for cards with compelling terms, and take the time to understand the fine print. Remember, the card may be in the business’s name, but you’re personally liable for the debt. Don’t take on more debt than you can handle.

Best 0% Financing

The American Express Blue for Business card offers 15 months of 0% APR for financing. If you fail to pay back your purchases within 15 months, your interest rate will move to 11.74%-19.74%, depending on creditworthiness. You lose access to the introductory rate if you make a late payment.

The 15-month 0% APR window is one of the most generous offers available. On top of generous financing, you earn rewards for spending.

You can also earn 10,000 Membership Rewards points after making your first purchase. Every year, you’ll also receive a bonus of 30% of the previous year’s points earned.

The card offers perks including secondary car rental insurance, purchase protection, extended warranties, baggage insurance, trip accident insurance, and travel hotline help.

The Fine Print
  • Introductory rate: 0% APR financing for 15 months. You must pay on time, or you lose this rate.
  • APR: After 15 months, 11.74%-19.74%, depending on your creditworthiness
  • Penalty APR: 29.74%
  • Annual fee: No annual fee
  • Late fee: Up to $38
  • Returned payment fee: $38
  • Cash advance fee: Greater of $5 or 3%
  • Cash advance APR: 25.74%
  • Rewards: 1 point per dollar spent on all other purchases.
  • Bonus: 2 points for every dollar you spend booking travel at amextravel.com

Apply Now

Low Interest Rates

If you and your business have excellent credit, the Platinum Plus for Business MasterCard from Bank of America offers low ongoing financing. This is a great card for businesses with periodic short-term borrowing needs. Besides interest rates as low as 9.74%, it offers a seven-billing-cycle 0% APR promo rate and $200 statement credit if you spend $500 in the first 60 days.

Plus, the card offers travel accident insurance, secondary rental insurance, and automatic downloads to QuickBooks.

Remember, it’s not wise to use a small business credit card for long-term financing. Many credit unions will offer low rates on installment business loans.

The Fine Print
  • Introductory rate: 0% APR financing for seven billing cycles.
  • APR: 9.74%-20.74% variable APR, depending on your creditworthiness (after seven billing cycles)
  • Annual fee: No annual fee
  • Late fee: $19-$49 (depending on your balance)
  • Returned payment fee: $39
  • Cash advance fee: Greater of $10 or 4%
  • Cash advance APR: 24.74%
  • Sign-up bonus: $200 statement credit if you spend $500 in your first 60 days
  • Rewards: None

Apply Now

Cash Flow Management

Managing cash flow can be one of the most difficult problems facing small business owners. The Plum Card by American Express makes cash flow easier. The Plum Card is a charge card not a credit card. This means that it is designed to give you access to short-term working capital. However, it is not a good source of financing.

If you pay your bill within 10 days of statement closing, you’ll get a 1.5% discount on eligible charges. Otherwise you have a full 60 days without interest before you need to make a payment. Beware, these benefits come at a steep price. After one year, you’ll pay a $250 annual membership fee. Plus, carrying a balance on a charge card comes with huge penalties. The first time you go past due, you’ll be charged 1.5% of the balance. After that, they charge a late fee of 2.99%. The minimum fee is $38.

The Fine Print
  • Late fee: 1.5%, then 2.99%; minimum of $38
  • Returned payment: $38
  • On-time payment bonus: 1.5% discount if you pay balance within 10 days of statement closing
  • Annual fee: $0 for the first year, $250 thereafter
  • No cash advance
  • Rewards: None

Apply Now

Imperfect Credit

If you’re struggling to get approved for a small business credit card, the Spark Classic from Capital One offers an excellent option. The card has a high variable APR (23.49%) and mediocre rewards (1% cash back). But Capital One will approve business owners with just average credit.

This isn’t a great card for borrowing, even in the short term. However, the Spark Classic will give you some working capital, and it will help your business build its credit. Just remember to pay your bill on time each month and to keep your credit use low.

The Spark Classic also offers perks like purchase protection, free extended warranties, and travel and emergency assistance. These protections offer tremendous value to business owners.

The Fine Print
  • APR: 23.49% variable APR
  • Annual fee: No annual fee
  • Late fee: Up to $39
  • Cash advance fee: Greater of $10 or 3%
  • Cash advance APR: 23.49%
  • Rewards: 1% cash back on all purchases

Apply Now

Cards for Service Members

Former and current members of any branch of the military can join Navy Federal Credit Union and apply for these high-quality credit cards. The Visa and MasterCard have the same fees and conditions, but they offer different perks.

 

Navy Federal Credit Union’s Visa for Business credit card gives former service members access to low interest rates and rewards spending. This can be an excellent choice for service members with excellent credit who may have to borrow for short-term needs.

The card gives access to the Visa SavingsEdge program, which gives up to 15% off business purchases at qualifying retailers. However, the card doesn’t offer extended warranties or other protections, so it isn’t always the best choice.

The Fine Print
  • APR: 9.65%-18.0%
  • Annual fee: No annual fee
  • Late fee: Up to $20
  • Returned payment fee: Up to $20
  • Cash advance fee: $0 at Navy Federal Credit Union branch ATM, 50 cents domestic, $1 foreign
  • Cash advance APR: APR + 2%
  • Rewards: 1 point per dollar spent

Apply Now

Navy Federal Credit Union’s MasterCard for Business credit card gives former service members access to low interest rates and rewards. The low interest rates make it a compelling choice for service members with short-term borrowing needs.

The card gives access to the MasterCard Easy Savings program, which gives automatic 10% rebates at a network of gas stations, auto repair shops, and shipping companies. This can lead to significant savings. The card also connects to the MasterCard Business Network, which makes expense reports easy. However, the card doesn’t offer extended warranties or other protections.

The Fine Print
  • APR: 9.65%-18.0%
  • Annual fee: No annual fee
  • Late fee: Up to $20
  • Returned payment fee: Up to $20
  • Cash advance fee: $0 at Navy Federal Credit Union branch ATM, 50 cents domestic, $1 foreign
  • Cash advance APR: APR + 2%
  • Rewards: 1 point per dollar spent

Apply Now

Best Cards for Rewards

Many small business credit cards offer compelling rewards to cardholders. These rewards can allow you to reinvest in your business, or you can take them for personal use. If you choose to use a rewards credit card, try to avoid paying interest. Most of these cards are not good choices for short-term borrowing.

Travel Perks

If you’re a frequent traveler, these small business credit cards give you access to incredible perks. But be sure to read the fine print. These cards have a few gotchas attached.

 

The American Express Business Platinum Card is a charge card with a premium price tag ($450 per year) and premium benefits for some users. Please note, it is not a credit card; you should not plan to borrow money with this card. These are the most significant perks:

  • Global Lounge Collection access, which includes access to Delta Sky Club lounges and American Express Centurion lounges
  • $200 airline fee credit (for checked bags, inflight refreshment, etc.)
  • One free Global Entry or TSA Pre-check application fee (allows you to expedite security at select airports and U.S. Customs)
  • 10 free passes per year to inflight Gogo Wi-Fi and unlimited Boingo (land-based Wi-Fi) access
  • 50% airline points redemption bonus on first- or business-class tickets (if you spend 100,000 points on a business-class ticket, you’ll get 50,000 points back 6-10 weeks later)
  • Starwood Preferred Guest Gold Elite Status, which also gets you Marriott Rewards Gold status for room upgrades and free breakfast. It also gets you access to the Fine Hotels and Resorts Program (perks like in-room WiFi, complimentary breakfast, and other hotel perks at participating luxury hotels).
  • Elite status for National car rental for free upgrades whenever you rent a car.
  • This could be a great card for frequent Delta fliers; not only do you get access to the Delta Sky Club lounges but you can also convert the points you earn into Delta SkyMiles.
The Fine Print
  • Annual fee: $450
  • Late fee: 2.99% or $38, whichever is greater
  • Returned payment fee: $38
  • No cash advance
  • Sign-up bonus: Earn 50,000 Membership Rewards points after you spend $10,000 within three months of card membership. Earn 25,000 more points after spending an additional $10,000 within your first three months.
  • Rewards: 1 point per dollar spent
  • Bonus rewards: 1.5 points per dollar for first $5,000 spent in a year; 2 points per dollar spent through amextravel.com.

Apply Now

As a business owner, little incidentals can add up in a big way. The Chase Ink Business Preferred Card mitigates these costs by providing high-value insurance protection to you and your employees. Not only will you earn rewards (outlined in the fine print), you’ll enjoy these perks, too.

Trip Cancellation/Trip Interruption Insurance
If your trip is canceled or cut short by sickness, severe weather, or other covered situations, you can be reimbursed up to $5,000 per trip for your pre-paid, non-refundable travel expenses, including passenger fares, tours, and hotels.

Trip Delay Reimbursement
If your common carrier travel is delayed more than 12 hours or requires an overnight stay, you and your family are covered for unreimbursed expenses, such as meals and lodging, up to $500 per ticket.

Travel Accident Insurance
When you pay for your air, bus, train, or cruise transportation with your card, you are eligible to receive accidental death or dismemberment coverage of up to $500,000.

Auto Rental Collision Damage Waiver
Decline the rental company’s collision insurance and charge the entire rental cost to your card. Coverage is primary when renting for business purposes and provides reimbursement up to the actual cash value of the vehicle for theft and collision damage for most cars in the U.S. and abroad.

Baggage Delay Insurance
You are reimbursed for essential purchases like toiletries and clothing for baggage delays over six hours by passenger carrier up to $100 a day for five days.

Lost Luggage Reimbursement
If you or an immediate family member check or carry on luggage that is damaged or lost by the carrier, you’re covered up to $3,000 per passenger.

Extended Warranty Protection
This warranty extends the time period of the U.S. manufacturer’s warranty by an additional year on eligible warranties of three years or less.

Cellphone Protection
Get up to $600 per claim in cellphone protection against covered theft or damage for you and your employees listed on your monthly cellphone bill when you pay it with your Chase Ink Business Preferred Credit Card. There is a maximum of three claims in a 12-month period with a $100 deductible per claim.

The Fine Print
  • APR: 16.49%-21.49%
  • Annual fee: $95 per year
  • Late fee: $15-$39, depending on balance
  • Returned payment fee: $39
  • Cash advance fee: Greater of $15 or 5% of transaction
  • Cash advance APR: 25.49%
  • Sign-up bonus: 80,000 points when you spend $5,000 in the first three months
  • Rewards: 1 point per dollar spent, 3 points per dollar spent on travel, shipping purchases, internet, cable or phone services, or online advertising (social media or search engines)
  • Bonus: Points worth 25% more when you redeem through Chase Ultimate Rewards (Chase’s travel website)

Big Introductory Bonuses

Business owners who know they’ll spend a lot in a short period of time should take note of these cards. These bonuses provide excellent value if you can meet the spending requirements. But be wary: these cards have high interest rates. You won’t come out ahead if you end up financing a big purchase with these cards.

The Business Platinum Card offers excellent travel perks, but it offers an unparalleled sign-up bonus, too. Right now, you can earn 50,000 Membership Rewards points after you spend $10,000 within three months of card membership. You’ll also earn 25,000 more points after spending an additional $10,000 within your first three months.

If you plan to spend $20,000 or more in the next three months, this bonus is worth the highest value when redeemed for travel rewards. Depending on which option you choose, this bonus may offset annual fees. You need to churn through a lot of money to meet the spending minimums, but this is a lucrative bonus.

Click here to see details including perks and the fine print.

The Chase Ink Business Preferred Card offers ideal perks for frequent travelers, but right now you can get a great sign-up bonus, too. By spending $5,000 in three months, you’ll earn 80,000 points. This bonus is worth $1,000 if you spend your points through Chase Ultimate Rewards for travel or $800 if you redeem for cash back. You can also transfer the points to airline partners like United and Virgin Atlantic and hotel partners like Marriott and Hyatt.

In addition to the lucrative bonus, you can earn everyday spending rewards (including 3 points per dollar spent in certain categories) and valuable trip insurance.

Click here to see details including perks and the fine print.

Cash Back Rewards

Every business owner can benefit from more cash in their pocket. These cards give you the best cash back offers for everyday spending. You can find better rewards if you use multiple cards, but these have excellent rewards for those who don’t want to mess around with multiple cards. Plus, these cards have excellent protections, too. But be careful when you finance with these cards; they don’t offer great terms for borrowing.

 

The Spark Cash card from Capital One offers unlimited 2% cash back on all purchases, and it is free for the first year. Plus, if you spend more than $4,500 in the first three months of holding the card, you get a $500 cash bonus. After the first year, you’ll pay $59 to hold the card. After the first year, if you spent more than $3,000 per year, it’s worth it.

The Spark Cash card also offers valuable protective features like purchase protection, free extended warranties, primary auto rental collision coverage, and more. Overall, the Spark Cash card gives straightforward rewards to business owners with excellent credit.

The Fine Print
  • APR: 17.49% variable APR
  • Penalty APR: 29.9% (applied if you make a late payment)
  • Annual fee: Free for the first year, $59 per year afterward
  • Late fee: Up to $39
  • Cash advance fee: Greater of $10 or 3% of transaction
  • Cash advance APR: 23.49%
  • Sign-up bonus: $500 reward when you spend $4,500 in the first three months
  • Rewards: 2% cash back on all spending

Apply Now

The Spark Cash Select card from Capital One offers a rare combination of friendly financing terms and rewards. You’ll earn an unlimited 1.5% cash back rewards on all purchases, and you’ll receive a $200 sign-up bonus if you spend $3,000 or more in your first three months.

On top of that, you’ll have a 0% APR financing rate for nine months, and an APR as low as 13.49% afterward.

This isn’t the most lucrative rewards card, but you won’t pay an annual fee. This makes it a great card for businesses that don’t spend as much on a credit card.

The Fine Print
  • Promo APR: 0% for nine months
  • APR: 13.49%-21.49%, depending on your creditworthiness
  • Penalty APR: 29.9% (applied if you make a late payment)
  • Annual fee: $0
  • Late fee: Up to $39
  • Cash advance fee: Greater of $10 or 3% of transaction
  • Cash advance APR: 23.49%
  • Sign-up bonus: $200 reward when you spend $3,000 in the first three months
  • Rewards: 1.5% cash back on all spending

Apply Now

Best Category Bonuses

If you and your employees spend a lot of money in a limited number of categories, you might want to consider a rewards card with heavy bonuses in those categories. These cards offer at least 3 points for every dollar you spend in a given category. That’s the equivalent of a 3% reward.

Remember, rewards cards aren’t usually a good choice for financing purchases. Look to pay off these cards every month.

Online Advertising

Businesses that regularly advertise on social media networks (Facebook, Twitter, etc.) or via search engines (Google, Bing) can earn impressive rewards on their marketing spending. These are the best cards for heavy online advertisers.

 

You’ll earn 3 points for every dollar you spend on online advertising. In addition, you’ll be eligible for travel perks, sign-up bonuses, and more.Click here to see details including perks and the fine print.

The American Express Business Gold Rewards Card allows you to choose to earn 3 points per dollar spent on any one of the following categories: advertising in select online media, airfare from airlines, gas, shipping, or computers and cloud services from select providers. You’ll earn 2 points per dollar on the categories you don’t choose.

All other spending earns 1 point per dollar you spend.

As a sign-up bonus, you’ll earn 50,000 points if you spend $5,000 or more in your first three months of holding the card. In addition to the rewards, you get trip accident insurance, extended warranties, and purchase protection.

Since the Business Gold Rewards Card is a charge card, you shouldn’t plan to borrow with the card. But the rewards for online advertisers are excellent. Just watch out for the $175 annual fee that kicks in after the first year.

The Fine Print
  • Annual fee: $0 for the first year, then $175
  • Late fee: 2.99% or $38, whichever is greater
  • Returned payment fee: $38
  • No cash advance
  • Sign-up bonus: Earn 50,000 Membership Rewards points after you spend $5,000 within three months of card membership
  • Rewards: 1 point per dollar spent
  • Bonus rewards: 3 points in one category (pick between advertising in select online media, airfare from airlines, gas, shipping, or computers and cloud services from select providers).
  • 2 points rewards on remaining four categories.

Apply Now

Dining and Travel

Dining and travel cost a lot, but these cards offer enticing rewards. The cards we recommend offer more than 3% cash back on restaurant spending, travel, or both. Plus, they have other compelling perks. But most of these cards aren’t great for borrowing, so check the fine print.

 

The American Express Blue for Business card offers the single best dining deal, at least during your first six months. During the first six months of holding the American Express Blue for Business card, you’ll get 10 points for every dollar you spend at a restaurant up to $2,000. Once the six-month offer period is over, you may want to turn to other rewards programs from the cards we outline below.

This is also one rewards card that has a decent financing option. Right now you can get 0% APR financing for the first twelve months.

Learn more here about the perks, rewards, and fine print before you apply.

Looking to thin down your wallet? A Sam’s Club Business MasterCard, doubles as your membership card. But it’s not just for wholesale shopping. Spending on the Sam’s Club Business MasterCard gives you the opportunity to earn 3% cash back rewards on all restaurant spending worldwide. It also gives 5% cash back rewards on gas (except when purchased at other wholesalers) and 1% on all other spending.

Road warriors and frequent business entertainers will love this card. Plus, the $45 statement credit (if you spend $100 the day you open it) pays for your annual Sam’s Club membership.

The Fine Print
  • APR: 15.15%-23.15%
  • Penalty APR: 29.99% (applied if you make a late payment)
  • Annual fee: $0 (requires $45 Sam’s Club membership)
  • Late fee: Up to $39.99
  • Cash advance fee: Greater of $5 or 3% of transaction
  • Cash advance APR: 20.15%-26.15%
  • Sign-up bonus: $45 statement credit when you spend $100 on your first day (applying in-store makes this easy).
  • Rewards: 1% cash back on all spending. Maximum of $5,000 back in a given year.
  • Bonus rewards: 3% on dining and travel expenses. 5% on gas (up to $6,000 in gas purchases). Gas cannot be purchased from other wholesale clubs.

Apply Now

If you prefer Costco to Sam’s Club, the Costco Anywhere Visa Business Card offers similar terms. Their 4-3-2-1 program includes 4% on gas purchases (up to $7,000 per year), 3% cash rewards for all dining and travel expenses, 2% on Costco purchases, and 1% on all other spending.

While the rewards are sweet, the terms can be expensive. This is not a good card for borrowing, so be sure to pay it off each month.

The Fine Print
  • APR: 0% for seven months, then 15.74%
  • Penalty APR: 29.99% (applied if you make a late payment)
  • Annual fee: $0 (requires $55 Costco membership)
  • Late fee: Up to $37
  • Returned payment fee: Up to $37
  • Cash advance fee: Greater of $10 or 5% of transaction
  • Cash advance APR: 22.49%
  • Rewards: 1% cash back on all spending.
  • Bonus rewards: 4% on gas (up to $7,000 in gas purchases). Gas cannot be purchased from other wholesale clubs. 3% on dining and travel expenses. 2% rewards on all purchases from Costco and Costco.com.

Apply Now

If you’re a frequent business traveller, Chase Ink offers the best rewards. You earn 3 points for every dollar you spend on travel, but you get a travel bonus. Every point is worth 1.25 points when you book through Chase Ultimate Rewards.

Travel perks also include trip insurance, auto rental collision damage waivers (this is primary coverage), and more.

Click here to see details including perks and the fine print.

Gas

 

As a small business owner, you know that driving can be an economical choice, but you can also earn rewards for all those miles on the road. Sam’s Club Business MasterCard gives 5% cash back rewards on gas (except when purchased at other wholesalers), and 1% on all other spending.

Even if you don’t frequent Sam’s Club, this is the best category for rewards for gas purchases.

Click here to see details including perks and the fine print.

Learn More

Risks of Using Small Business Credit Cards

Many business owners see credit cards as an easy solution to their capital needs. But small business credit cards have unique risks. Savvy entrepreneurs will consider the risks before opening a new line of credit. These are the most important considerations.

 

1. Personal Liability

As a small business owner, you’re personally liable for credit card debt. Business bankruptcy won’t protect you. Whether your business succeeds or fails, you have to pay back the debt.

The only way to get rid of small business credit card debt is to declare personal bankruptcy. Bankruptcy destroys your credit history for a few years, and it stays on your report for 7-10 years.

Don’t treat a credit card like venture capital. It’s not. You need to repay it.

2. Credit Bureau Reporting

Small business cards don’t report to the credit bureaus the same way personal cards do. Depending on which card you choose, if you pay your credit card on time, you may not see any information on your personal report. For most business owners, that is a good thing. It will keep your personal credit utilization low.

However, an unpaid bill will show up on your personal credit report. A bill that goes unpaid for 60 days will generally appear on your personal credit report. Some banks offer more generous reporting and some less. You can speak with a banker to determine your bank’s reporting standards. Still, your personal credit score can take a hit at the same time that your business credit runs afoul.

When you take out a business credit card, put precautions in place to protect yourself. You can limit employee spending, and remove authorized users. You can also set up automatic payments each month.

3. Not Protected by the Credit CARD Act

In 2009, Congress passed the Credit CARD Act. The act curtailed predatory lending behaviors, including raising interest rates on existing balances. It also required credit cards to be more transparent about rates and fees.

This act does not apply to business credit cards. With a small business card, banks can raise the interest rate on your existing balance at any time. A higher interest rate means a bigger minimum payment and a longer time to pay off your debt. If you’re using your small business credit card to finance something, you could be at risk.

Still, many banks will not raise your rate if you have an excellent history of on-time payments. It is simply a risk to understand.

Another risk related to the Credit CARD Act is the possibility of double-cycle billing. Business credit cards do not require an interest accrual grace period. This means you may begin accruing interest on purchases right away. We only recommend cards that have a grace period of at least 23 days built in. If you choose a different card, be sure to check for this in the rates and fees schedule.

4. Employee Risk

Small business credit cards make it easy to watch employee spending. Still, they pose serious risks. You’re personally liable for any employee spending on a credit card. If you wouldn’t trust an employee with your wallet, don’t trust them with a company card. Employees can rack up debt and leave the company. That leaves you with a bill and no recourse to get the money back.

The Best Ways Use Small Business Credit Cards

Once you understand the risks of small business credit cards, you can also understand their best uses. Over 65% of small businesses use credit cards on a regular basis. Some use them for rewards, and some for financing. In fact, close to 10% of all small business financing comes from credit cards.

Here are some of the best ways to use a small business credit card.

 

1. Earning Rewards and Protection

If you pay your small business credit card in full each month, you can earn substantial rewards. Many business credit cards offer perks, including cash back, travel rewards, extended warranties, trip insurance, and more. As a business owner, you can reinvest the rewards into your business or take them for personal use.

2. Managing Cash Flow

Cash flow problems destroy small businesses, but credit cards provide short-term working capital. If you have a sales cycle that lasts 30 days or less, a credit card can fund inventory purchases. By the time your bill comes due, you’ll have money to pay it off. If you follow this practice, you’ll pay no interest, and you’ll manage your cash flow.

Credit cards can simplify employee monitoring, too. Most business credit cards allow you to place individual restrictions on employee use. That means you can limit how much and where employees can use company cards. But your employees may manage to misuse the cards. If they do, you will be stuck with the bill.

3. Building Business Credit

Businesses have credit reports just like people. Business credit cards can help you build your score. To build your business credit, hold the card under your employer identification number (EIN).

When your EIN establishes a record of paying its bills on time, it makes your business creditworthy. That means you’ll have an easier time finding long-term loans at great rates.

63% of all small businesses carry debt. Having a lower interest rate on that debt could make the difference between success and failure. This means every small business should take their credit history seriously from the outset. Small business credit cards may allow you to build that history without paying interest or fees.

4. Short-Term Borrowing

Small business credit cards have high interest rates, but they can work for short-term borrowing. If you know that you’ll only carry debt for a few months, you may want to finance something with a credit card.

Credit cards do not have origination fees or prepayment penalties. Sometimes this means that they offer the best terms for short-term borrowing. Just be careful when you borrow, and pay it back quickly. High interest debt compounds over time.

If possible, borrow on a card with a 0% introductory offer. Remember, failing to pay off 0% interest purchases may result in back interest. Be sure you understand the risks before you borrow.

The Worst Ways to Use Small Business Credit Cards

Small business credit cards aren’t always the best tool to get the job done. These are a few times when you should avoid using credit cards.

 

1. Personal Expenses

Bad accounting sinks many entrepreneurs. Always keep your personal spending off of your business credit cards. This will simplify bookkeeping, and it will keep your business credit utilization low. If you need to borrow for personal expenses, look for a low-interest credit card instead.

2. Long-Term Financing

Due to the high interest rates, most businesses should not finance long-term commitments using credit cards. Instead, consider an installment loan from a local credit union or a bank.

Applying for an installment loan can be a pain, but the lower interest rate will be worth it in the long run. Keep money in your pocket and avoid small business credit cards for long-term financing.

3. Cash Advances

Cash advances are the most expensive way to use a credit card. Banks begin charging interest right away, and the advance has a higher interest rate. Cash advances also have high fees of up to 10% of the amount you withdraw.

If you need cash, withdraw it from your business checking account instead, or take out a traditional loan.

4. Financing a Failing Business

Do not use credit cards to help a failing business limp along. Too many people will not give up on their idea even when the execution doesn’t work out. Credit card debt will bury a failing company and erode your personal wealth.

Remember, negative credit behavior will show up on your personal credit report. Plus, courts hold you liable for all credit card debt your business incurs. Use an objective lens to decide whether you need to shut down your business.

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Best of

The Best Tax Software of 2017

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

If you’re like most Americans, you dread filing your taxes. You have to track down the right forms, deal with the IRS, and try to remember all your deductions and credits. That’s why so many people turn to online tax software to help file taxes. Great tax software simplifies the filing process without draining your pocketbook. But choosing the right software can be as much work as filing your taxes.

To help you choose the right software, we’ve tested 11 of the leading online tax software packages. We’ve ranked each software on the following criteria: usability, helpfulness of support articles, availability of audit support, and accessibility of tax and technical support. Then, we compared these criteria to the price to determine which software package is best for your situation.

Which tax software fits your needs? Find out below.

Best Tax Software of 2017

Best Free Filing Service

Of the 11 tax software packages we reviewed only two allow all users to file state and federal taxes for free.

Best Software: Credit Karma Tax

Credit Karma Tax features an outstanding user interface with easy interview questions. The built-in calculators make Credit Karma appropriate for even complex filers. You can’t import information, and Credit Karma doesn’t have robust help, but it’s easily the best software you can use for free.

 

Runner-up: DIY Tax

DIY Tax is a joint partnership between Liberty Tax Services and eSmart Tax. Their user interface is clunky, but it has all the functionality you need. Their software interface allows you to import prior tax returns, and they have excellent support articles.

Best for Simple Filing

Simple filers are W-2 employees who claim the standard deduction. You typically file as Single or Married Filing Jointly. You don’t have dependents, and you earn less than $100,000.

Best Software: TaxAct, free edition

TaxAct offers completely free state and federal filing options for simple filers. However, they do charge $10 for prior year import. The user experience is easy, and TaxAct offers free tax and technical support.

Runner-up: Credit Karma Tax

Credit Karma Tax offers free filing for all users, and they have an easy-to-use interface. While they only offer email tech and tax support, Credit Karma allows simple filers to explore more complex credits and deductions for free.

Best for Maximizing Deductions and Credits

Charitably inclined people, most homeowners, parents who pay for child care, and people who qualify for the earned income tax credit may want to maximize deductions and credits.

Best Software: Credit Karma Tax

Most software packages require you to upgrade to itemize deductions or claim credits. With Credit Karma Tax you can claim them for free. The only problem with Credit Karma Tax? If you fail to qualify for a credit, they don’t offer great explanations.

Runner-up: TaxSlayer Classic

TaxSlayer Classic offers federal filing for $17 and state filing for $22. The software is easy to use and intuitive. It even allows you to upload your W-2 form. For maximizing deductions and credits, you won’t find a better software for the price. TaxSlayer gives you access to technical support, but you need to upgrade to ask tax-related questions.

Easiest for New Filers

We assume that new filers have simple forms to file, but they want a clear user interface and ready access to tax and technical support.

Best Software: 1040.com EZ

1040.com offers free federal filing, and state filing for $9.95. Normally, we don’t recommend paying for a service that you can get for free elsewhere, but new filers will love 1040.com’s user interface and live chat support. Their tax and tech professionals can quickly guide you if you get stuck.

Runner-up: Credit Karma Tax

Credit Karma Tax has an excellent user interface that you can use for free. Even new filers can use the interview questions to determine whether they qualify for credits or deductions. Unfortunately, Credit Karma only offers email support.

Best Audit Protection

The IRS has the right to audit anyone, but people with complex taxes run a greater audit risk. No tax software (or accountant) can prevent you from getting audited. However, some tax software will give you access to a tax specialist or accountant if you undergo an audit. These are the software services that can lend a hand if you need it.

Best Software: FreeTaxUSA Deluxe

FreeTaxUSA Deluxe costs $6.99 for federal filing and $12.95 for state filing. FreeTaxUSA does not feature an intuitive user interface, but they have built-in calculators that most complex filers need. They also promise to give you personal assistance if you’re audited. If you can stand the software, it’s the best price for audit protection.

Runner-up: TaxSlayer Premium

TaxSlayer Premium costs $35 for federal filing and $22 for state filing. At the Premium level, trained tax professionals will help you if you’re audited after using the TaxSlayer software. The software is generally easy to use. However, the amortization and depreciation calculators can be confusing.

Why H&R Block and TurboTax didn’t make the cut

Historically, H&R Block included audit assistance with all of their paid programs. This year, you can only get that protection if you purchase the desktop software. If you purchase H&R Block online, you can pay an additional $79.99 for a “Best of Both” package. In this package, a tax professional reviews your filing, and they offer in-person support if the IRS audits you.

In the past, TurboTax included audit assistance with their paid package. This year, if you want audit assistance from TurboTax, you have to pay for the $44.99 “MAX” package. They give some additional security measures and access to in-person support if you’re audited.

Because of the increase in price, these historic powerhouses didn’t make the cut for best audit protection.

Best Interface for Health Care Premium Tax Credit

Health insurance isn’t only confusing during open enrollment. Tax time means that you’ll need to figure out how much of the premium tax credit you qualified for during the year. If you were on an Obamacare health plan for any part of the year, you’ll need to look for software that can handle this credit.

Best Software: OLT.com

OLT.com offers free federal filing and $9.95 state returns. It’s got a poor user interface, but their Affordable Care Act section offers excellent support articles, and it’s easy to use. You can’t import forms, but it’s easy to copy data from your 1095-A onto the software.

This software is only appropriate for simple filers with a marketplace plan. Everyone else should look elsewhere.

Runner-up: TurboTax Deluxe

TurboTax Deluxe costs $34.99 for federal filing and $36.99 for state filing. This is a steep price if you want to itemize deductions and maximize credits. However, TurboTax offers the best Affordable Care Act information on the market. They even allow you to upload your 1095-A form to the software.

Best for Investors

If you buy and sell stocks, bonds, or options outside of your tax-advantaged retirement accounts, you need a tax software that can handle all your information. Tax software for investors needs to handle dividends as well as short-term and long-term capital gains.

Best Software: H&R Block Premium – Online version

H&R Block Premium online software costs $54.99 for federal filing and $36.99 for state filing. But the price is well worth it in this case. H&R Block allows you to import all major forms from many financial institutions. If you actively trade, you need this capability. H&R Block also has accurate accounting for short-term gains and losses, which will help investors minimize the tax they owe. H&R Block also has helpful community forums and unlimited real-time chat support if you need help.

Runner-up: Credit Karma Tax

Credit Karma Tax offers a free solution for all kinds of investors. You must manually enter all your trading information, but Credit Karma calculates capital gains and losses and the appropriate tax rate. It’s a decent (and free) solution for less active investors.

Best for Real Estate Investors

Real estate investors need to calculate depreciation. They need to amortize certain expenses and deduct others. This can be confusing for DIY tax preparers. The best tax software for real estate investors needs to feature helpful support articles, intuitive depreciation and amortization calculators, and as many import features as possible.

Best Software: TurboTax Premier

TurboTax Premier costs $54.99 for federal filing and $36.99 for state. The real estate portion of TurboTax is second to none. If you use QuickBooks software to manage your real estate accounting, you can connect it directly to TurboTax. If you don’t, you can still upload a Schedule E or use the robust calculators.

Runner-up: H&R Block Premium

H&R Block Premium also costs $54.99 for federal filing and $36.99 for state. The software allows users to import many documents including an entire Schedule E. The depreciation and amortization calculators offer standard inputs, but they are flexible enough for special events. H&R Block also makes it easy to import last year’s tax return. Most real estate investors need this to accurately report depreciation.

Best for Self-Employed People

Are you a freelancer or contractor? If so, you know that you can deduct many business-related expenses. This means that taxes can get messy in a hurry. The best tax software for self-employed people makes it easy to claim business deductions. It will also offer robust explanations that will help you understand amortizing equipment expenses and whether you qualify for a home office deduction.

Best Software: Credit Karma Tax

Credit Karma Tax makes it easy for you to find and deduct appropriate expenses if you’re self-employed. Their built-in amortization calculators are easy to use, and Credit Karma offers helpful explanations. Outside of the most complex self-employment situations, Credit Karma is a simple filing solution.

Runner-up: Jackson Hewitt Basic

Jackson Hewitt Basic software offers one of the lowest cost Schedule C-EZ forms if you’re self-employed. The cost is $19.95 for federal returns and $36.95 for state returns. Their extensive support articles and helpful interface mean that you can find the help you need at the right price. Plus, you can get unlimited live chat support from technical assistants. If you need help from tax experts, you will have to pay for a consultation at a local Jackson Hewitt office.

Best Bargain for Self-Employed People

When you’re self-employed, you don’t always have the luxury of choosing the best-value product. Sometimes, you just need the cheapest product that will get the job done. If that’s you, these are the software products you should consider.

Best Software: Credit Karma Tax

Credit Karma Tax is the best 100% free option if you’re self-employed. It offers all the functionality you need.

 

Best Software: FreeTaxUSA

FreeTaxUSA allows free federal filing and $12.95 state filing. Their calculators and website are adequate for self-employed people. This software allows you to deduct mileage, amortize expenses, and categorize meals and entertainment. FreeTaxUSA isn’t beautiful, but it gets the job done at a low price. If you upgrade to Deluxe, you’ll even get audit assistance.

Best for Small Businesses

Sole proprietors and single member LLCs can also use tax software for self-employed people. As long as the software supports a Schedule C, it will work for your small business needs.

If you’re part of a partnership, a corporation, or a multi-member LLC, then you need more than the standard tax software that we reviewed above.

Corporations need software that supports Form 1120. S Corporations (with more than one member) need tax software that supports Form 1120S. Partnerships and multi-member LLCs need software that supports Form 1065.

If you need business tax software consider one of these options.

TurboTax Business

$149.99 federal (up to five federal e-files); $49.99 per state + $24.99 per state e-filing fee.

TurboTax Business offers the same interview style interface that consumers love, but it offers increased functionality. Small business owners will especially love that they can use it to create unlimited W-2 forms and 1099-MISC forms.

H&R Block Premium and Business

$79.95 federal (up to five federal e-files); first state software free, after that: $35 per state + $19.95 per state e-filing fee. H&R Block offers an excellent interview style user interface with increased functionality such as creating employee forms. This software supports the major forms for businesses, plus the form for nonprofit organizations.

TaxAct for Small Businesses

TaxAct bundles federal and state filing and software for a total of $100. You can purchase federal filing only for $60. TaxAct has a slightly more stripped-down user interface than H&R Block or TurboTax, but business owners can easily complete everything. You can even create as many employee tax forms as you need.

 

Tax Software Pricing, Plans, and Insights

Credit Karma Tax

Credit Karma Tax offers free federal and state filing for all users. With a robust and easy-to-use interface, it’s an excellent default choice for most filers. Their guided path through the tax software is as good as the most expensive tax software on the market. But it has a few shortfalls. You can’t import your prior year’s taxes. This makes year-to-year comparisons impossible within the software. You also can’t import any forms, which can be a pitfall for active traders and real estate professionals.

Credit Karma offers tax and tech support via email. They currently have at least a 3-day wait time for answers. Credit Karma doesn’t offer audit support either.

Superlatives: Best Free Filing Service, Best for Maximizing Deductions and Credits, Best for Self-Employed People, Best Bargain for Self-Employed People, Runner-up Best for Simple Filing, Runner-up Easiest for New Filers, Runner-up Best for Investors

DIY Tax

DIY Tax offers 100% free federal and state filing for everyone. Their user interface is a bit clumsy, but it proves accurate and usable. They even allow you to import your prior year’s taxes for your reference. Real estate investors and small business owners need to be careful with this platform. The depreciation and amortization calculators can be confusing. Their software offers technical support, but they push Liberty Tax Service offices for tax support. The software doesn’t come with an audit support guarantee.

DIY Tax is sponsored by Liberty Tax, and you will see ads for their offices in the software. Remember, filing in a Liberty Tax office isn’t free.

Superlatives: Runner-up Best Free Filing Service

eSmart Tax

eSmart Tax and DIY Tax are the same software package. However, you have to pay for eSmart Tax. Why would you pay? The Deluxe and Premium packages offer unlimited phone or email support from tax specialists, which can prove helpful. But in most cases eSmart Tax isn’t a great option.

 

Free Basic Deluxe Premium
Price $0 Federal $29.95 State $14.95 Federal
$29.95 State
$19.95 Federal
$29.95 State
$34.95 Federal
$29.95 State
Best For 1040EZ Homeowners, people with dependents, sole proprietors Stock market investors without capital gains or losses Freelancers, real estate investors, people who sold a home in the previous years

Superlatives: None

TaxSlayer

TaxSlayer has an incredible user interface and helpful support articles. When it comes to itemizing deductions or finding credits, it is one of the easiest to use tax software packages on the market.

Unlike most tax software, TaxSlayer supports all forms on its second-tier Classic level. This means that anyone could complete their entire tax return at a relatively low price. Their Premium level gives you access to live chat support, audit protections, and help from tax professionals.

However, TaxSlayer has two demerits. First, you cannot import a prior year’s tax return from a competitor. The only tax information you can use is information you entered into TaxSlayer during a previous tax year. Second, TaxSlayer doesn’t allow you to see internal calculations for depreciation and amortization. That makes TaxSlayer inappropriate if you’re a real estate investor or self-employed.

 

Simply Free Classic Premium
Price $0 Federal
$0 First State ($22 each additional)
$17 Federal
$22 State
$35 Federal
$22 State
Best For 1040EZ All others (itemizers, stock market investors, real estate investors, self-employed, etc.) Comes with audit assistance, ask a task professional, and live chat support

Superlatives: Runner-up Best Audit Protection, Runner-up Best for Maximizing Deductions and Credits

TaxAct

When does free really mean free? When it comes to simple tax filing through TaxAct. People who file a 1040 or 1040EZ can file federal and state taxes for free through TaxAct. Even if you don’t qualify for free filing, TaxAct usually represents an excellent value. At any level, you can receive phone and email support from tax and technical professionals. TaxAct doesn’t offer audit support, but it is priced accordingly.

For the most part, TaxAct simplifies tax filing. It uses simple questions, helpful knowledge articles, and easy navigation to help you complete your taxes. They even make it easy to import your prior year’s taxes into their software. TaxAct also offers some of the best guidance if you’re a stock market investor or self-employed.

Despite all these praises, the software stumbles somewhat on its real estate coverage. The depreciation calculator seems clumsy in certain areas. Outside of this flaw, TaxAct offers tremendous value for the price.

 

Free Plus Premium
Price $0 Federal
$0 State
$27 Federal
$33 State
$37 Federal
$33 State
Best For 1040EZ, 1040A (no dependents, claiming standard deduction) Itemizers, stock market investors Self-employed, real estate investors

Superlatives: Best for Simple Filing

OLT.com

OLT.com offers bargain basement pricing, but it shows in the interface. You have to pay $7.95 for tax and technical support. Nonetheless, the $7.95 also brings audit support, which offers some value.

Their clumsy user interface only allows you to import prior year tax forms from its own database. Their support articles send you to the even more confusing IRS website.

However, OLT.com offers a few bright spots. The health insurance coverage is easy and accurate. It is the only tax software that makes it easy to claim the premium tax credit for part of the year. Also, the real estate depreciation calculators are flexible enough to deal with complex circumstances.

In most cases, we don’t recommend OLT.com, but a few people may benefit.

 

Free Premium
Price $0 Federal
$9.95 State
$7.95 Federal
$7.95 State
Best For All major schedules supported Anyone who wants audit support

Superlatives: Best Interface for Health Care Premium Tax Credit

1040.com

According to 1040.com, tax filing should be smart and simple. If you’re a new filer or a freelancer with basic expenses, 1040.com delivers. 1040.com offers free live chat and email technical support. They also have support articles that are approachable and informative.

In fact, their entire software is friendly and informative. New filers are likely to appreciate the high-quality and low-cost support from 1040.com, but other simple filers can find better deals elsewhere. Their friendly interview style interface starts to falter if you’re a real estate or stock market investor. You will need to add forms that don’t have built-in calculators. This means that 1040.com is best for people with less complexity in their filing.

 

Free $19.95 $39.95
Price $0 Federal
$9.95 State
$19.95 Federal
$14.95 State
$39.95 Federal
$19.95 State
Best For 1040EZ Stock market investors Self-employed, real estate investors, itemizers

Superlatives: Easiest for New Filers

H&R Block Online

H&R Block is one of the biggest names in tax software for good reason. People with complex tax returns will love the value that H&R Block offers. H&R Block offers unlimited technical support to all filers, and phone and chat tax support for those who pay. The only disappointment is that H&R Block online filing customers do not get a free in-person audit support. This is reserved for those who purchase a $79.99 “Best of Both” upgrade or who download H&R Block’s software.

However, the H&R Block interface offsets this disappointment. H&R Block offers easy navigation, helpful interview questions, and robust articles that can help you untangle even the most complex filing situation. H&R Block’s built-in calculators are flexible enough to deal with uncommon filings. Plus, you can import most major forms, including prior year’s tax returns from competitors. This makes H&R Block ideal for anyone with complex filings.

Their software isn’t quite as easy to use as TurboTax, but it’s quite a bit less expensive. In particular, freelancers and self-employed people with basic expenses will see huge value since they can purchase the Deluxe edition.

 

Free Deluxe* Premium*
Price $0 Federal
$0 State
$34.99 Federal
$36.99 State
$54.99 Federal
$36.99 State
Best For New filers, basic filers (allows for earned income tax credit), homeowners Stock market investors, self-employed with basic expenses, other itemizers Real estate investors, self-employed with more complex expenses

*Deluxe and Premium filers can upgrade to a $79.99 “Best of Both” package. This means that a CPA will review your return and you’ll receive in-person audit assistance.

Superlatives: Best for Investors, Runner-up Best for Real Estate Investors

TurboTax

If you’re looking for the Cadillac of tax software, TurboTax emerges as the winner. Their interface is easy to use and navigate. TurboTax even allows you to import last year’s taxes from any of their competitors. 1040EZ filers will even get to file federal and state returns for free. After that, the price climbs quickly. But for many filers the high price is well worth the cost.

The interview style format makes tax filing simple, even if you’re facing a complex situation. Paying customers who get stuck can get help from tax or technical professionals. TurboTax takes their support seriously. With your permission, support staff can “draw” on your screen to guide you through tough situations.

Real estate investors, self-employed people, and small business owners will appreciate TurboTax’s robust interface. The one thing they won’t appreciate? The price of audit support. TurboTax’s MAX costs $44.99. This is the only way to get audit support from TurboTax this year.

 

Free Deluxe Premium Self-Employed
Price $0 Federal
$0 State
$34.99 Federal
$36.99 State
$54.99 Federal
$36.99 State
$89.99 Federal
$36.99 State
Best For 1040EZ/ 1040A Itemizers Investors, real estate investors Self-employed

*Anyone can upgrade to TurboTax’s MAX for $44.99.

Superlatives: Best for Real Estate Investors, Runner-up Best Interface for Health Care Premium Tax Credit

FreeTaxUSA

FreeTaxUSAand TaxHawk offer the same tax software at the same price. They are owned by the same parent company, and you can even move your profile from one site to the next. The websites aren’t pretty, but experienced filers will find everything they need to complete their taxes. You can even upload prior year’s tax returns from competitors. This is a huge value given the bargain basement pricing.

FreeTaxUSA offers two pricing tiers. Both levels support all major tax forms. You can also access chat support from tax and technical specialists from both levels. However, upgrading will give you priority access to specialists. Upgrading also gives you access to a tax specialist if you’re audited.

The name might lead you to believe you’re getting free tax filing, but you’ll have to pay at least $12.95 for state filing. Nonetheless, FreeTaxUSA is a great bargain — especially if you have a complex filing situation.

 

Free Premium
Price $0 Federal
$12.95 State
$6.99 Federal
$12.95 State
Best For All major schedules supported Anyone who wants audit support

Superlatives: Best Audit Protection, Best Bargain for Self-Employed People

Jackson Hewitt Online

Jackson Hewitt brings the neighborhood tax filing office online. They feature excellent knowledge articles and easy interview style tax filing. It’s easy to import your taxes from any major competitor or from Jackson Hewitt. This makes switching to Jackson Hewitt Online easy.

Built-in calculators make depreciation and amortization easy. However, Jackson Hewitt doesn’t offer many import options. This makes their relatively high pricing difficult to justify. Simple filers (1040EZ) and self-employed people with basic expenses may see high value in the Jackson Hewitt software. After all, they offer live chat tech support to all their customers. If you need tax support, you’ll have to upgrade to Premium to get the phone support.

Jackson Hewitt also allows online filers to pay extra for an in-person tax consultation. Prices for these meetings vary by location.

It’s important to note that this review is only for the online Jackson Hewitt software package. Magnify Money did not review Jackson Hewitt office preparations.

 

Free Basic Deluxe Premium
Price $0 Federal
$0 State
$19.95 Federal
$36.95 State
$34.95 Federal
$36.95 State
$54.95 Federal
$36.95 State
Best For 1040EZ Freelancers Investors, families with dependents, homeowners, itemizers Small business owners, real estate investors

Superlatives: Runner-up Best for Self-Employed People

 

Tax Software FAQs

Is online tax software safe?

Tax-related identity theft is the number one reported form of identity theft. However, most theft isn’t the direct result of using online software. Any time you apply for a credit card or use online banking, your information enters the digital world. If this information gets stolen, you’re at risk. Nobody can eliminate the possibility of identity theft, but you can work to protect yourself.

Part of protecting yourself involves only giving out your information on trusted websites. When you file your taxes, you provide all your personally identifiable information to a software service. You need to know whether or not that information is safe.

Every software company that we reviewed is an Authorized IRS e-File provider. This means that these sites comply with the security and business standards set forth by the IRS.

None of the software packages we reviewed will sell your personal information to a third party. Each of the software packages we reviewed requires you to use multi-factor authentication. This makes it difficult for hackers to access your personal information. These websites are as secure as possible, but they are not 100% safe.

If you think you’ve been the victim of tax fraud, contact the IRS immediately at 1-800-908-4490 to work with their resolution specialists. You will need to file an identity theft affidavit that explains that someone filed taxes in your name.

What if I don’t want to use tax software?

If you don’t want to use tax software, you can choose a paper filing option. Each state requires you to mail your check to a different office.

You can also use the IRS’s free electronic fillable forms. However, these offer limited guidance and can be difficult to use. With so many other free options, these should be a last resort.

Finally, you can hire a professional tax preparer to do your taxes for you. Be sure that the person you hire is in the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

Should I hire an accountant?

An accountant can save you time, headache, and in some cases, money. Tax professionals must follow the tax code, but their specialized knowledge helps them pick up on deductions or credits that you might miss on your own.

In general, the more complex your tax return, the more you may want to hire an accountant. If you choose to hire an accountant, be sure that they are an authorized tax return preparer. They should sign your return as an authorized preparer.

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Credit Cards, Identity Theft Protection, News

Credit Cards That Offer Identity Theft Resolution — Too Good to Be True?

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Credit Cards That Offer Identity Theft Resolution — Too Good to Be True?

Molly Johnson, 56, of Minneapolis, Minn., felt adrenaline pumping when she got a call from Wells Fargo in September 2016. The representative informed her that they suspected fraudulent activity on her credit card.

Johnson confirmed the fraudulent charges, and Wells Fargo shut down the credit card. She didn’t have to pay for any of the stolen funds, and she got a new credit card in the mail a few days later.

“When I realized that was it, I thought to myself, ‘that wasn’t so bad,’” she told MagnifyMoney.

Every major credit card in the United States offers their customers $0 fraud liability. That means if a thief steals your credit card number, you don’t have to pay for the item as long as you inform your bank. Much of the time, your bank informs you of fraudulent activity before you detect it.

Having a bank protect you from fraud offers a huge benefit for cardholders. But some banks, including Citigroup and MasterCard, are taking this responsibility a step further. They now offer identity theft resolution services. That means they will help their account holders restore their identity after instances of fraud — even if the fraud happened through an unrelated account.

What are identity theft resolution services? And how do they compare to identity theft products you can buy? We dug into the fine print to help you understand.

What are identity theft resolution services?

If someone steals your identity or financial information, it’s important to restore your identity as soon as possible. This process involves fixing your credit report, removing bogus charges from your accounts, and recovering stolen funds. Depending on the severity of the fraud, this could involve sending letters to collection agencies that believe you owe them money or disputing debts from other services. In a worst-case scenario, you may need to clear your name of criminal charges.

Read More: Credit Monitoring and Identity Theft Protection Guide

Doing this on your own can be a time-consuming task. Restoring your identity takes average of 4 hours, but up to 130 hours in 5% of identity theft cases, according to the Federal Trade Commission. But some credit cards will help you save time by working with you as you restore your identity. Citigroup and MasterCard give their customers free access to designated specialists who give guidance and insight into resolving identity theft problems. In some cases, MasterCard will do the work for identity theft victims.

What do credit card companies promise?

Two companies promise some level of identity theft resolution assistance. We read their service agreements to explain what they really offer.

Citigroup

It’s more accurate to call Citibank/Citi’s perks identity theft resolution assistance. They won’t restore your identity for you, but they simplify the process. Customers can call on Citi’s identity theft resolution services even if the fraud didn’t originate from their Citigroup accounts.

Citigroup customers who suspect that they’ve been the victim of identity theft can simply call the Citigroup Identity Theft Hotline (1-800-274-6660). The hotline is staffed by a team of identity theft resolution specialists. Identity theft resolution specialists help customers check their credit report for fraud. (That’s something you can do proactively, too.) They give customers advice on contacting creditors and the credit bureaus.

Specialists even help customers complete an identity theft affidavit. An identity theft affidavit is a notarized document that provides evidence that you were the victim of identity theft. Banks and creditors will use the information inside the affidavit to fix problems that arose as the result of identity theft.

Citigroup specialists also watch a customer’s credit report and keep in touch with them until their identity theft issue is fixed. This level of guidance can be a tremendous help.

MasterCard

MasterCard offers two levels of identity theft resolution: the MasterCard ID Theft Protection program and full identity theft resolution.

MasterCard ID Theft Protection program

The MasterCard ID Theft Protection program is part of MasterCard’s core credit benefits. Every MasterCard holder is eligible to participate in the program.

MasterCard customers who suspect they are the victim of identity theft can contact 1-800-MasterCard to report an identity theft incident. You can report incidents, even if they did not originate on your MasterCard. When you call, you will get into contact with an identity resolution specialist.

The specialist will help you by providing you with an identity theft affidavit and explaining all the steps that go into unraveling identity theft. They will help you contact all three credit bureaus, so you can get a copy of your credit report. This support matches the support that Citigroup offers.

Full identity theft resolution from MasterCard

MasterCard also offers more robust resolution assistance on a limited number of co-branded credit cards. These credit cards have a specific set of benefits called World Elite MasterCard Benefits. Many (but not all) travel rewards MasterCard credit cards have full resolution benefits.

Customers with this benefit can opt to let an identity theft resolution specialist restore their identity for them. When a customer reaches out to the identity theft hotline, they have the option to give MasterCard’s identity theft specialist a limited power of attorney (LPOA). The LPOA allows the specialist to resolve identity theft problems on behalf of the customer. Specialists file forms for the customer, clean up the customer’s credit report, and resolve fraud. Specialists keep customers updated on their progress, but customers don’t have to do work.

This program offers enormous protection and time savings to all eligible customers. It is almost identical to purchasing identity theft resolution services from Zander Insurance, Prosper Daily, IDShield, or ProtectMyID. The only difference? MasterCard doesn’t limit your financial losses associated with identity theft. Identity theft expenses can include notary signatures, credit-freezing and credit-thawing expenses, and legal expenses.

Are you eligible for this highest level of protection? Look for the phrase “Concierge Level Certified Restoration specialist who works on behalf of the cardholder” in your credit card’s guide to cardholder benefits.

These are the 10 credit cards that offer MasterCard’s concierge level services, including four with no annual fee.

How to restore your identity on your own

When you’re the victim of identity theft, the biggest cost to you is usually not money — it’s your time.

These are the steps that the Federal Trade Commission recommends when you’ve been the victim of identity theft.

  • Call companies where the fraud occurred and ask them to freeze or close your account.
  • Place a 90-day fraud alert at one of the three major credit bureaus.
  • Get a copy of your credit report from all three bureaus.
  • Report the identity theft to the FTC.
  • Close new accounts opened in your name.
  • Remove bogus charges from your existing accounts.
  • Clear your credit reports of fraudulent information.

Depending on your situation, you may also need to do the following:

  • Create a police report.
  • Create an identity theft affidavit.
  • Stop creditors from contacting you.
  • Look for fraudulent checking accounts through ChexSystems.
  • Contact the IRS or other government bureaus.
  • Get help from a lawyer.

Need in-depth guidance on each step? MagnifyMoney’s Identity Theft Protection Guide will help you through each step.

Even when you know the steps to take, the amount of work can be overwhelming.

Consider Molly Johnson’s situation mentioned earlier. Five minutes spent resolving fraud isn’t a big deal. However, on October 31, Molly fell for a phishing scheme while on vacation. A fraudster called her hotel room and claimed to be the front desk. The fraudster asked for her credit card information, and Molly gave it to them.

A few minutes later Wells Fargo called her cellphone. Again, they asked Molly about some fraudulent charges, which Molly confirmed. The fraudulent charges didn’t go through, but that wasn’t the end of the fraud. Over the next day, the thief tried to take out three cash advances totaling over $1,500. Wells Fargo never released the funds.

The thief also used Molly’s personal information to access her savings account and two of her children’s checking accounts, all housed at Wells Fargo. The fraudster moved funds between the accounts, but Wells Fargo prevented any theft.

That wasn’t the end of the fraud. The thief tried to order a new debit card from Molly’s unrelated checking account at Northeast Bank. Thankfully, Northeast Bank security measures prevented the fraudster from getting a debit card.

Wells Fargo worked with Molly to move money back to the correct accounts and remove fraudulent charges. With those removed, Molly spent 10-12 hours resolving the identity theft and protecting herself against future attacks. She’s still nervous about what will happen when the fraud alert comes off her credit report.

Are identity theft resolution services enough?

Choosing one of the credit cards above ensures you won’t spend much time restoring your identity if you fall victim to identity theft. However, the best battle is the one you don’t have to fight. That’s why we still recommend that you take care of your identity through common-sense protection and regular credit monitoring. Your credit card company might help you out if you fall victim to identity theft, but protecting your identity is your responsibility.

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Identity Theft Protection, News

Is Credit Sesame’s $50,000 Identity Theft Insurance Worth the Hype?

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Is Credit Sesame's $50,000 Identity Theft Insurance Worth the Hype?

If you register an account with Credit Sesame, the credit monitoring and financial recommendations company now provides an unconventional perk: a free identity theft insurance policy with $50,000 worth of coverage.

Identity theft insurance, like the insurance offered by Credit Sesame, helps victims of fraud to recoup money they may spend to resolve the issue. In minor cases of fraud, victims may have to pay for notary expenses, to freeze and thaw their credit, or to replace a visa, passport, or driver’s license. In serious cases, victims may lose wages when they take time off from work to deal with identity theft. Some victims may even have to pay for legal representation.

Without insurance, it is possible — but not always the case — that victims might have to pay out of pocket to resolve cases of identity theft.

Credit Sesame’s identity theft insurance policy might be “free,” but is it worth getting excited over? We took a closer look at the policy and compared it to similar offerings from competitors.

Here’s what we found.

Yes. It really is free.

Free sounds good, but it’s usually filled with gotchas. Is Credit Sesame’s identity theft insurance really free? Yes. It’s real insurance, and you really don’t have to pay. Despite the $0 price tag, the insurance policy isn’t half bad.

What Credit Sesame’s policy covers:

With a few exceptions, Credit Sesame’s policy covers:

  • Application re-filing fees
  • Courier costs
  • Notary costs
  • Court costs
  • Legal representation (up to $75 per hour)
  • Lost base wages if you need to take time off from work (self-employed people can’t receive any compensation)
  • Dependent care coverage
  • Travel costs
  • Postage or other communication costs

What Credit Sesame will not cover:

Credit Sesame’s insurance never replaces stolen money that has been taken from a bank, savings, or other financial account.

Like most other identity theft insurers, Credit Sesame also won’t reimburse identity theft costs if the theft occurred under suspect conditions.

  • Credit Sesame will not cover fraud perpetrated by the victim or a family member of the victim.
  • They will not reimburse customers who voluntarily gave up their account numbers.
  • They only cover cases of identity fraud. That means if the fraudulent activity occurred because the victim or a bank employee made an error, the victim can’t get reimbursed for those costs.

Is that enough insurance?

Most of Credit Sesame’s competitors (and Credit Sesame’s premium product) offer up to $1 million in identity theft recovery services, so a $50,000 policy may seem skimpy. But bigger policies don’t necessarily offer better benefits.

Many million-dollar ID theft policies aren’t a great deal. You’re unlikely to spend thousands resolving identity theft. According to the Federal Trade Commission, most people spend just $40 for resolving identity theft. Five percent of identity theft victims spent more than $2,000 resolving identity theft.

The highest potential cost associated with identity theft is the cost of legal representation. Credit Sesame’s policy offers to cover $75 per hour for legal needs. But some attorneys can charge much more than that. According to Lawyers.com, a database that matches consumers with lawyers, most experienced lawyers charge $100-$200 per hour. So if a victim has to hire a lawyer, Credit Sesame’s policy may cover only some of their legal fees.

You might be worried that Credit Sesame doesn’t reimburse stolen funds, but in most cases banks will reimburse you anyway. The Fair Credit Billing Act (FCBA) and the Electronic Fund Transfer Act (EFTA) protect consumers from having their accounts drained.

The FCBA assures that you have to pay a maximum of $50 in fraudulent charges on a credit account. Your credit card company will reimburse your for the rest. In fact, most credit card companies have $0 fraud liability. That means you don’t have to pay for any fraudulent charges at all.

The EFTA covers you if someone steals money from your checking account. As long as you report fraud on your checking account within 48 hours, your bank will reimburse you for all but $50 of the charges. If you wait 2-60 days, the bank could leave you with $500 in losses.

Unless you have significant assets in a brokerage account, you’re legally protected. In the rare case that the law doesn’t protect you, your insurance probably won’t either. Most ID theft insurance companies limit their reimbursement of stolen funds to somewhere between $10,000 and $25,000.

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Is it worth signing up for a Credit Sesame account?

Credit Sesame’s insurance is a useful tool to limit financial exposure, and it can be a part of your plan to protect yourself against identity theft. But the reality is you probably don’t need identity theft insurance. You may prefer to keep your email address to yourself rather than get blasted with emails from Credit Sesame.

Most people can handle the $40 out-of-pocket fees associated with identity theft. Even $2,000 of costs can be manageable if you have an emergency fund.

When it comes to identity theft, the biggest cost you’ll face is the cost of your time. On average, victims spend four hours unraveling identity theft issues, and 5% of victims spend more than 130 hours. Credit Sesame’s insurance product won’t help you with that.

If you want identity resolution services, you can get them as a free perk from several credit cards, including:

You can also compare identity theft monitoring and resolution services on the MagnifyMoney website to find a product that suits your needs.

How to sign up

In order to take advantage of Credit Sesame’s ID theft protection, you’ll need to sign up on the site using your email address. You’ll provide personal information, including your Social Security number and your address. You cannot get free insurance unless you complete your Credit Sesame member profile.

Is it safe to provide this information? Credit Sesame promises that they will not give or sell your information to third parties without your express permission. They use multifactor authentication, which makes it difficult for hackers to take your information from their website.

What’s the catch?

The value of Credit Sesame’s insurance protection policy may not be worth the cost of handing over your email address. Customers are bound to receive marketing emails from the company, encouraging you to visit the site to check your credit score. Once on the site, you’ll receive recommendations to sign up for certain credit card or financial products that may or may not be best for your needs.

Eventually, Credit Sesame will nudge users to upgrade their Credit Sesame service.

Credit Sesame pushes their premium service offerings to existing customers. If you pay more, you can get up to $1 million of insurance and more monitoring. The additional insurance coverage still won’t reimburse you for stolen funds that your bank won’t replace.

The costs for these products include:

  • $14.95 for monthly reports from the three credit bureaus.
  • $19.95 for credit resolution help from an assistant.
  • $24.95 for lost wallet resolution assistance and dark web monitoring.

These prices are higher than competitors, and Credit Sesame’s product doesn’t offer full resolution coverage at any price.

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Mortgage

Guide to Getting the Best Rate on Your Mortgage

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Guide to Getting the Best Rate on Your Mortgage

A house is the single largest asset that most Americans will ever buy. The median price of a home sold in the United States is up to $301,300, and the median household income of a homeowner is $60,000. This means that a house now costs more than five times the income of a typical homebuyer.

With prices so high, it’s more important than ever to find a great rate on your mortgage. Finding the lowest rate can save you tens of thousands of dollars over the lifetime of a loan. But finding the best rates on the loans with the right features can be a challenge. In this guide we’ll teach you how to find the best mortgage rates.

Finding the best rate on a mortgage

When it comes to buying a house, you don’t just need to house hunt; you need to shop for a mortgage. According to the Consumer Financial Protection Bureau (CFPB), just 53% of Americans shop for mortgages, but comparing lenders has a huge payoff. Saving 1% on your rate will save you tens of thousands of dollars over the life of your loan. Your mortgage can make or break the affordability of a house, and it’s up to you to find the best rates. These are the steps you can take to find the best rates.

Compare rates using the CFPB’s handy tool

The CFPB offers a tool that allows you to compare the prevailing interest rates on various types of loans. To use the tool, you need to know your credit score, the amount you intend to borrow, and how much money you have for a down payment.

By exploring the different options, you can determine the best rates in your state, and the most common rates.

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This tool will give you an idea of the rate landscape in your state. However, you still need to do work to get the best rates.

Next, find lenders that offer the lowest rates

Once you know the lowest interest rates, you can find the lenders offering those rates through search engine queries. Enter the following formula: “State Mortgage, X% Interest Rate, Loan Type.”

For example, “Alabama Mortgage, 3.75% Interest Rate, 30-Year Fixed Rate.”

The bank or credit union with the best rate should emerge near the top of the search rankings. You will find mortgage comparison websites that will help you connect with the banks. Mortgage comparison websites can be a helpful resource, but they require your contact information. If you use a comparison site, expect to receive phone calls or email solicitations.

Continue to cross-reference the rates from comparison sites with information from the CFPB. The rates on a mortgage comparison site should be as good as those on the CFPB’s site.

If a lender has already pre-approved you, they may be willing to match the lowest rate. Talk with your loan officer about the rate you saw on the CFPB’s website. Ask them to match the rate. If they will, the conversation saves you time and money.

Get pre-approved for a mortgage from multiple banks

Once you find the banks with the best rates, consider getting pre-approved for mortgage rates from a few different banks. A pre-approval means that a bank plans to give you a loan at a given rate. You will need to submit documentation to a loan officer to get pre-approved. Typical documentation includes W-2 forms, tax returns, credit reports, and evidence of assets.

The bank will review your documentation and give you a pre-approval letter. The letter explains how much you can borrow and at what rate. If you’re denied at this stage, you can find out why.

A pre-approval is not a contract. It is not subject to underwriting or an appraisal. Rates can change after you get a pre-approval. That’s why we recommend getting multiple pre-approvals if you can.

When you’re pre-approved, a bank will give you a letter that you can submit with offers on a home. Home sellers want to see a pre-approval letter because it means that you’re likely to have access to the financing to close a deal.

Once you have pre-approvals in hand, start shopping for houses. You can submit a bid and negotiate a price using your pre-approvals.

Request loan estimates from lenders

Once a seller accepts your bid, request loan estimates from all the banks that pre-approved you.

A loan estimate is a three-page document that contains an estimated interest rate, monthly payments, and closing costs for the specific loan. It explains everything you need to know about the loan if you choose to move forward.

Compare all the loan estimates before committing to a particular mortgage lender. Loan estimates allow you a true apples-to-apples comparison of interest rates.

A loan estimate isn’t a contract. The bank may deny the loan based on the home’s appraisal values or due to underwriting problems. But a loan estimate will allow you to make an informed decision.

Factors that influence your interest rate

Shopping for a mortgage isn’t the only way to find the best interest rate. You can influence the rate by controlling these factors.

Credit score

The better your credit history, the better your rate will be. In some cases, the difference can be a full percentage point or more. Fixing your credit score is one of the best ways to influence your mortgage rate. Depending on your credit history, you might be able to fix your credit score on your own within a few months.

When you’re shopping for a mortgage, pay your bills on time and keep your credit usage low. Try to use 10% or less of your total available credit. Don’t close old credit accounts or apply for new accounts when mortgage shopping. These actions promote a high credit score while you shop for a mortgage.

Down payment & PMI

In general a bigger down payment means a lower interest rate.

If you put down at least 5%, you will probably qualify for the lowest advertised rates. But don’t confuse the lowest interest rates with the lowest cost financing. Most banks require you to purchase private mortgage insurance (PMI) if you don’t put at least 20% down on a home. PMI adds about .5%-1% per month on your mortgage. You won’t be able to remove PMI until you’ve built up at least 20% equity in your home. You build equity when your home rises in value and when you pay down your mortgage.

If you have a down payment less than 5%, you’ll need to look at FHA loans or VA loans. VA loans don’t require PMI, but you will have to pay an upfront financing fee. This is a fee that doesn’t help you build equity, but VA loans have competitive rates for people who don’t have a down payment. Check the fee schedule for VA loans to see if the financing fee is worth it to you.

FHA loans require just a 3.5% down payment, but FHA loans have require mortgage insurance premiums (MIP). The MIP is an upfront fee (usually 1.75% of the total mortgage) and monthly interest rate hike of around .5%. You can’t get rid of MIP unless you get rid of your FHA loan.

Location

Buyers looking for a mortgage in a rural area may see higher rates compared to equally qualified buyers in nearby urban areas. Most lenders have less familiarity with lending in rural areas. This leads to higher rates. In rural settings, you may get the best rates from nearby banks and credit unions.

Rates also differ on a state-by-state basis. States that have laws that make foreclosure difficult tend to have higher mortgage rates than states with looser foreclosure laws. Likewise, states that require lenders to have a physical presence in the state raises interest rates.

Loan size

Interest rates on small mortgages (less than $50,000) tend to be higher than rates on typical mortgage sizes. Small mortgages are less profitable than other loans, and many banks won’t issue this size mortgage. Borrowers may need to work with local banks or credit unions or government lending programs to find a micro-mortgage.

At the other end of the spectrum, jumbo mortgages tend to track closely to conforming loan interest rates. Banks can’t sell jumbo loans in the secondary market, so they are riskier for the bank compared to other mortgages. Usually, banks compensate higher risk with higher interest rates. However, the rigorous underwriting on jumbo loans may drive many poor prospects out of the market.

Length of loan (Loan term)

Mortgages with shorter terms have lower rates than those with longer terms. A longer term represents more risk for the bank. Banks compensate their risk with higher interest rates. This doesn’t mean that a shorter term loan is always the right choice. Choose the loan term that fits your needs before you compare rates. That way you’ll get the best interest rate on the right mortgage for you.

Fixed or variable rates

Adjustable-rate mortgages put more risk onto borrowers. You’ll initially pay a lower interest rate if you take out an adjustable-rate mortgage, but the rate might increase.

When you’re considering an adjustable-rate, learn when and how the interest rate adjusts. Most loans adjust based on a set index. In a low interest rate environment, you can expect rates to increase, but you need to guess how much. Weigh whether the low rates now are worth a potential high rate in the future.

Conforming vs. FHA vs. VA vs. conventional

The company that backs your loan may seem unimportant, but it influences your rate.

Conforming loans (those that can be purchased by Fannie Mae or Freddie Mac, the largest purchasers of mortgage loans in the U.S.) tend to have the lowest interest rates. Despite their low interest rates, conforming loans are profitable for banks. Banks can easily sell conforming loans to Fannie Mae or Freddie Mac and reinvest the proceeds in making more loans. Conforming loans require at least a 5% down payment and good credit. For conforming loans, put 20% down to avoid paying PMI.

FHA loans have more lenient down payment and credit standards. They tend to be expensive for well-qualified buyers. However, an FHA loan may be the right option if you have a low down payment or a poor credit score. Only you can determine if the extra cost is worth it for you. VA loans are available to veterans, and they charge an upfront fee. However, they offer competitive rates for first-time homebuyers. If you can qualify for a VA loan, look into it as an option.

Conventional loans can’t be purchased by Fannie Mae or Freddie Mac. They require more shopping around to find the best rates. Not every lender issues conventional loans. If you qualify, the rates should be competitive with rates on conforming loans.

If you’re taking out a jumbo mortgage, you need to qualify for conventional underwriting. Likewise, condo buyers may need to qualify for a conventional loan. Fannie Mae and Freddie Mac will not purchase a mortgage if the property is part of an association that has more than 50% renter occupants.

Buying points

Many lenders offer to let borrowers buy “discount points” off of a mortgage. This means that you pay a set fee in exchange for the lender to lower your rate. In some circumstances buying discount points makes sense. Divide the cost of the point by the change in your monthly payment. This will tell you the number of months it takes for the prepayment to pay off (in terms of savings). If you expect to stay in the house significantly longer than the payoff period, go ahead and purchase the points. Otherwise, pay the higher interest.

Closing costs

An advertised interest rate doesn’t account for your total cost to borrow money. Most banks make their real money by charging closing fees. Banks might charge loan origination fees, recording fees, title inspection fees, underwriting fees, and application fees.

All the financing charges will be disclosed on a loan estimate. The loan estimate will also provide you with an annual percentage rate (APR), which expresses the total cost of borrowing money including the financing fees.

Special programs

Cities and states often issue special interest rates on loans for homebuyers who meet certain criteria. For example, Raleigh, N.C., subsidizes a $20,000 down payment loan for low-income, first-time homebuyers in distressed neighborhoods. Check your city, county, and state websites to see if you qualify for special rate programs. These programs often have favorable borrowing terms in addition to great rates.

Accelerating payments

Some borrowers cut their total interest costs by accelerating their mortgage payoff. If you make a half mortgage payment every two weeks, you’ll make an extra mortgage payment every year. This cuts a 30-year mortgage down to 23 years.

Making extra payments early in the life of your loan will help you achieve 20% equity faster. This will allow you to drop PMI payments or refinance at a lower rate.

Determining a budget for your loan

Finding a great rate on a loan that you can’t pay back is a sure way to destroy your credit. Before you apply for a loan, establish a realistic budget for your monthly mortgage payment. Avoid borrowing more than you can comfortably pay back.

When banks approve you for a mortgage, they will lend based on your current debt-to-income ratio without considering your other costs of living. Lenders have some limits, but you need to establish your own limits. Most of the time, lenders will not extend mortgage loans to borrowers whose monthly debt liabilities eat up more than 43% of their gross monthly income.

To understand debt-to-income ratio, consider this example. A person with a $60,000 annual income and a $500 monthly car payment applies for a mortgage.

A bank will allow them to carry a debt load up to $2,150 per month (($60,000/12)*43%). The bank subtracts the $500 from the maximum allowed debt load and determines that this person can afford $1,650 in house payments each month.

The bank in this example determines that $1,650 a month is an affordable budget.

No matter how large a loan you can get, you need to be a savvy consumer. The Consumer Financial Protection Bureau recommends that your entire housing payment (including taxes, insurance, and association dues) should take up no more than 28% of your gross income.

The CFPB’s advice may seem too strict, but you need to determine your non-mortgage-related cost of living before committing to a new loan. Calculate costs like income taxes, transit expenses, and child care or education costs. If you pay alimony or for out-of-pocket health care, consider those costs too. Plus, you’ll need to factor in the costs of home maintenance. Experts recommend setting aside 1%-3% of your home’s purchase price for maintenance and upgrades.

A 43% debt-to-income ratio may be manageable for people who expect a significant salary bump in the near future. But for many, such a high ratio could get you into credit trouble.

If you’re seriously shopping for houses, use Zillow’s advanced affordability calculator to determine how much mortgage makes sense for you. You can also learn if buying makes financial sense by using the Rent vs. Buy Calculator from realtor.com.

Before you start shopping for houses, determine how a mortgage will fit into your budget. Don’t succumb to pressures to overextend your budget. A burdensome mortgage has the power to turn a dream house into a nightmare. You can avoid the nightmare by planning ahead.

Determining loan features you want

In addition to establishing a budget, you need to understand how to find the right features on a mortgage. A great rate on a bad mortgage could spell financial ruin. When you’re shopping for loans, ask yourself these questions:

How long will you stay in the home?

Some buyers purchase houses with the intention of staying just a few years. Someone who plans to sell in a few years might consider a lower interest rate adjustable mortgage. However, an adjustable-rate mortgage is risky for someone who intends to live in a home long term.

How risky is your financial situation?

Do you and your partner have two steady jobs and a large cash cushion? In such a stable situation, you might feel comfortable putting 20% down. You might also feel good locking into a 15-year mortgage to save on interest.

People with less stable income and finances might feel more comfortable with a smaller down payment and a longer payoff period. This will mean paying PMI and higher financing costs, but they can be worth it for peace of mind.

Do you expect to have better cash flow in the future?

If you think that you’ll have more accessible cash flow in the future, you can borrow near the higher end of your limits today. An interest-only loan will allow you to get into a house with lower payments now and higher payments in the future. Of course, you need to be realistic about your future expectations. Your future income may be more modest than you hope, or you may face high costs in the future. An interest-only loan could leave you trapped in a house if housing prices decline.

Even if you expect a higher income, borrowing near the top end of your budget could keep you “house poor.” If the raise doesn’t pan out, you’ll be stuck in a house that you can’t comfortably afford.

Do you have access to other sources of financing?

Alternative sources of financing like a home equity line of credit make a loan with a balloon payment more viable. Alternative financing means that you’ll have options if your original mortgage payoff plan falls through.

Anyone considering a balloon payment loan should have a solid lead on alternative financing before they take out the loan.

How much cash do you have for a down payment?

You can purchase a house with almost no money down. For example, the Federal Housing Association (FHA) offers “$100 Down” home financing on select HUD homes, or down payments as low as 3.5% for FHA-backed loans. Veterans can purchase homes using $0 down VA loans.

On the other hand, if you have more money to put down, you may qualify for a conventional mortgage or a mortgage backed by Fannie Mae or Freddie Mac. The more cash you have, the more options you have for loan types.

Do you have compelling uses for cash outside of a home down payment?

Putting a large amount of money down on your home locks up the cash. You can access home equity through a home equity line of credit, but that introduces a new element of risk. Even if you have a large amount of cash, you may not want to use it to fund a down payment. For example, you may want to hold cash for an emergency fund, to start a business, or to fund some other purchase.

If you have a compelling reason to hold onto cash, you may intentionally narrow your mortgage search to low down-payment options.

How quickly do you want to pay off your house?

A paid-off home might be your top financial priority. In that case, you might want to look for options with a short payoff period. For example, you might prioritize the forced savings of a 15-year mortgage. You might even aim to payoff a 5/1 ARM before the first rate adjustment if you have sufficient cash.

How important is the monthly payment?

A lot of people prioritize a low monthly payment above any other factor. You can achieve a low payment by avoiding fees (like PMI), finding the lowest possible interest rate, and extending the terms of the loan. Even more important than those factors is borrowing an amount that you can easily afford under most circumstances.

Common mortgage terms

Sometimes the most difficult part about shopping for a mortgage is understanding the terms that lenders use. Below we’ve defined a few of the most common mortgage terms that you should know before you sign a loan.

  • Interest Rate – The amount charged by a lender for a borrower to use the loaned money. This is expressed as a percentage of the total loan amount.
  • APR – The annual percentage rate is the total amount that it costs to borrow money from a lender expressed as a percentage. The APR factors in closing costs and other financing fees.
  • Amortization Schedule – A table that shows how much of each payment goes to the principal loan balance versus the interest portion of the loan.
  • Term – A set period of time over which a fixed loan payment will be due (often 15 or 30 years).
  • Fixed-Rate Mortgage – A mortgage where the interest rate stays the same for the entire term of the loan.
  • Adjustable-Rate Mortgage – A mortgage where the interest rate changes based on factors outlined in the loan agreement. Often, the adjustment is tied to a certain publicly available interest rate like the Federal Exchange Rate. Adjustable-rate mortgages are considered riskier than fixed-rate mortgages due to the potential volatility of payments. Adjustable-rate mortgages (ARMS) include:
    • 1-Year ARM – A mortgage where the interest rate adjusts up to once per year for the life of a loan.
    • 10/1 ARM – A mortgage where the interest rate is fixed for ten years and then increases up to once per year for the remaining life of the loan.
    • 5/1 ARM – A mortgage where the interest rate is fixed for the first five years of the loan and then increases up to once every year for the life of the loan.
    • 5/5 ARM – A mortgage where the interest rate is fixed for the first five years of the loan and then increases up to once every five years for the life of the loan.
    • 5/25 ARM – Also known as the five-year balloon mortgage. A 5/25 loan is a subprime loan with a fixed rate for the first five years of the loan. If a borrower meets certain standards (usually a record of on-time payments), they will receive the right to refinance the remaining 25 years on an adjustable-rate mortgage. Otherwise, the bank requires a “balloon” or remaining balance payment after five years.
    • 3/1 ARM – A mortgage where the interest rate is fixed for the first three years of the loan and then increases up to once per year for the life of the loan.
    • 3/3 ARM – A mortgage where the interest rate is fixed for the first three years of the loan and then increases up to once every three years for the life of the loan.
    • Two-Step Mortgage – A mortgage that offers a fixed interest rate for a fixed period of time (usually 5 or 7 years). After the fixed period, the rate adjusts to current market rates. Often, the borrower can choose either a fixed rate or an adjustable rate during the second step.
  • Interest-Only Mortgage – A mortgage where a borrower pays only the interest on a loan for a fixed period (usually 5-7 years).
  • PMI – Private mortgage insurance is a product that protects a bank if you default on your mortgage. Lenders often require borrowers with less than 20% equity to purchase PMI.
  • Jumbo Mortgage – A mortgage that is larger than the standards for a “conforming loan” set by government-backed agencies. In most parts of the U.S. a jumbo loan must be larger than $417,000. In some of the highest cost of living areas, a jumbo is in excess of $625,000.
  • Fannie Mae – The Federal National Mortgage Association is a government-sponsored enterprise that purchases mortgages that meet certain criteria from banks that issue the mortgages.
  • Freddie Mac – The Federal Home Loan Mortgage Corporation is a government-sponsored enterprise that purchases mortgages that meet certain criteria from banks that issue the mortgages.
  • Conforming Loan – A mortgage that meets the funding criteria of Fannie Mae and Freddie Mac. The most stringent criteria is the loan size.
  • FHA Loan – A loan guaranteed by the Federal Housing Administration. Qualifying standards are not as stringent, but the fees are higher. In addition to a monthly premium (similar to PMI), borrowers pay a “borrowing” premium when they take out the loan.
  • VA Loan – A mortgage guaranteed by the Department of Veterans Affairs. Veterans can purchase houses with a $0 down payment when using a VA loan, provided the veteran meets other lending criteria.
  • Conventional Mortgage – A mortgage that is not guaranteed by any of the federal funding agencies. Certain homes or condominiums will only qualify for a conventional mortgage financing option.
  • Down Payment – The initial payment that a homebuyer supplies when purchasing a home with a mortgage.
  • Balloon Mortgage – A mortgage where a borrower pays fixed payments for a period of time (usually 5 or 7 years) after which the balance of the loan is due. This is considered a high-risk loan.

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College Students and Recent Grads

The Ultimate FAFSA Guide: Maximize Federal Student Aid for College

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

college student loans bills graduate

Over the past decade, college tuition rates rose an average of 5% per year. The average bachelor’s graduate in 2015 had over $35,000 in student loan debt. To graduate without burdensome debts, students must maximize their aid options. This means understanding the Free Application for Federal Student Aid (FAFSA), and using their knowledge to maximize student aid.

Starting with the 2017-2018 FAFSA, maximizing federal aid is easier than ever. The U.S. Department of Education now allows access to the FAFSA three months earlier (October rather than January). Applicants will also use an earlier year for income and tax information. This means it’s easy to incorporate FAFSA into the college application timeline.

What is the FAFSA?

The FAFSA is the Free Application for Federal Student Aid. It’s a dense form that students must complete to receive federal student aid.

The form ensures that federal student aid goes to students with the greatest need. However, this does not mean that only low-income families should fill out the form. Filling out the FAFSA is the only way to receive access to low-cost federal student loans. The FAFSA also gives families access to some scholarships, grants, and work-study programs. Some schools require a completed FAFSA for a student to apply for merit-based aid.

What do I need to fill out the FAFSA?

Filling out the FAFSA may seem daunting, but proper preparation will help families complete the application with minimal stress. One of the most important ways to ease the stress is to gather documents from the appropriate time. Use the chart below as a reference guide to understand the appropriate documents.

School attendance window FAFSA form FAFSA availability Income and tax year Assets and liabilities Born before this date for independent student status Homeless or self-supporting and at risk of homelessness after this date for independent status
July 1, 2016-June 30, 2017 2016-2017 January 1, 2016-June 30, 2017 2015 As of filing FAFSA January 1, 1993 July 1, 2015
July 1, 2017-June 30, 2018 2017-2018 October 1, 2016-June 30, 2018 2015 As of filing FAFSA January 1, 1994 July 1, 2016
July 1, 2018-June 30, 2019 2018-2019 October 1, 2017-June 30, 2019 2016 As of filing FAFSA January 1, 1995 July 1, 2017
July 1, 2019-June 30, 2020 2019-2020 October 1, 2018-June 30, 2020 2017 As of filing FAFSA January 1, 1996 July 1, 2018

Here’s a checklist of items you’ll need before filling out the FAFSA.

All Students

  • Social Security number
  • Alien registration number (if you are not a U.S. citizen)
  • Student’s federal income tax returns from the appropriate year
  • Student’s prior year W-2 or other earning statements from the appropriate year
  • Student’s records of untaxed income from the appropriate year
  • Student’s bank statements (checking, savings)
  • Student’s non-retirement investment account statements (after tax brokerage, 529 accounts, Coverdell ESA accounts, CDs, money market accounts)
  • Student’s record of non-taxed income (including income gifts that come from 529 plans owned by grandparents, income gifts to pay tuition, etc.)
  • Student’s records for investment real estate
  • An FSA ID to sign electronically

Dependent Students Only

  • Parent’s federal income tax returns from the appropriate year
  • Parent’s W-2 or other earning statements from the appropriate year
  • Parent’s records of untaxed income from the appropriate year
  • Parent’s banking and checking account statements
  • Parent’s non-retirement investment account statements (after tax brokerage, 529 accounts, Coverdell ESA accounts, CDs, money market accounts)
  • Parent’s records for investment real estate (not personal home)

Most students will be considered dependents. This is true even if a student is self-supporting for a period of time prior to starting college.

To be classified as independent, a student must meet one of these qualifications:

  • Student turns 24 prior to January 1 of FAFSA start year (see chart above)
  • Student is starting postgraduate studies
  • Student is on active military duty (not for training purposes or for state service only)
  • Student is a military veteran
  • Student supports dependent children
  • Student is a legally emancipated minor
  • Parents died after age 13, foster child after age 13, or dependent or ward of the state after age 13
  • Student is homeless or self-supporting and at risk of homelessness after July 1 in the year prior to start year (see chart above)

When are the FAFSA deadlines?

College students need to fill out the FAFSA every year that they want to receive federal financial aid. A traditional student who spends four years in school can expect to fill out the FAFSA four times through their college career.

Starting with the 2017-2018 FAFSA, the U.S. Department of Education extended the FAFSA deadlines. Previously, the U.S. Department of Education released the FAFSA on the January 1 prior to the attendance window. Applicants could complete the form from January 1 through the end of the attendance window.

when-are-the-fafsa-deadlines

Now, the U.S. Department of Education releases the FAFSA on October 1 prior to the attendance window. You may complete the FAFSA from the date it is released until the end of the attendance window. You can retroactively receive grants and loans for the school year provided that you complete the FAFSA by the end of the attendance window.

Deadlines for state and institutional aid

State and institutional aid organizations are not as lenient as the U.S. Department of Education. Most states require aid applicants to complete their FAFSA as soon after October 1 as possible. You can check your state-specific deadline on the FAFSA website.

Most states have just one FAFSA deadline, even if you plan to attend school on a delayed schedule. Often states give out aid on a first come, first served basis. Do not delay completing the FAFSA. You can work out changes based on your attendance after you’ve completed the FAFSA.

In general, you want to file the FAFSA as soon as you can to maximize institutional aid. Many universities grant institution-specific aid shortly after accepting students. Submit your FAFSA to all potential schools soon after you apply. Even if a school hasn’t accepted you yet, you should allow them to see your FAFSA responses.

Filling out the FAFSA alone may not be enough to get aid from your state or school. Many states require that you fill out additional forms to receive state-based aid. The most common form is the College Scholarship Service (CSS) profile. The CSS profile considers more data, and it offers students and their families the opportunity to flesh out their financial situation.

The CSS profile and other financial aid applications DO NOT replace the FAFSA. To get any federal student aid, you must fill out the FAFSA. You may also need to fill out additional forms. The Edvisors Network maintains a comprehensive list of state-based scholarships and grants. Students can research the forms that their state requires.

Students who are seeking college-based aid may have to complete institutional applications. These applications may be in addition to the FAFSA or in lieu of it. If aid details aren’t clear from the school’s website, contact the financial aid department to learn more. Many students find that their best chance at institutional aid comes right after applying to the school.

What happens after I fill out the FAFSA?

Three to five days after you complete the FAFSA, you will receive a Student Aid Report via email. This report is what schools will use to determine your eligibility for federal (and sometimes other) student aid.

Decoding your Student Aid Report

The most important number on the FAFSA is your Expected Family Contribution (EFC). Your family’s EFC is the amount parents and students are expected to allocate toward educational expenses. This amount can vary from zero dollars to more than the expected cost of college. This number is in the upper right-hand corner of the Student Aid Report.

In general, the lower your EFC, the more federal aid you will receive. Your specific eligibility for federal aid depends on your school’s cost of attendance.

The Student Aid Report also includes a Data Release Number (DRN). You will need this four-digit code to allow your school to change certain information on your FAFSA.

In addition to these two numbers, you will see your responses to questions on the FAFSA. If you find a mistake, you will need to correct it on FAFSA.gov. You can use your FSA ID to log in and submit changes. If your situation changes (such as the number of people in your parents’ household or your dependency status), you will need to update your FAFSA because it will change your EFC.

Schools submit awards packages to you

The U.S. Department of Education will send your Student Aid Report to any schools you have listed on your FAFSA. If you apply for another school after completing the FAFSA, you should log in to FAFSA.gov to submit your Student Aid Report to that school.

Once you’ve been accepted to the school, the school will use the EFC and their cost of attendance to determine your eligibility for federal aid. The school will send you a report that includes your eligibility for federal grants, subsidized and unsubsidized loans, and work-study programs. They may also send you details about other financial awards that you’ve received from the state or the institution.

You may need to contact the financial aid office at a school to see if you’re eligible for any scholarships or grants that they didn’t list. Be proactive in meeting other financial aid deadlines defined by your school’s financial aid office. Completing the CSS profile or institutional applications may allow you to earn more scholarships or grants or better loan rates. Check with schools where you’ve been accepted and your state’s website to learn more.

You can receive awards packages from multiple schools, even if you haven’t enrolled. Compare the awards packages to find the most cost-effective education. The federal aid will remain the same in every package, but the state and institutional aid can have a huge effect on your out-of-pocket costs.

Accept or decline aid

Once you choose a school, you will need to decide whether or not to accept the various forms of aid. Most people will accept grants and scholarships since those do not need to be paid off.

You will need to decide if accepting federal work-study or loans is best in your circumstances. You can work closely with a financial aid officer from your school to understand the pros and cons behind these options.

Once you make a decision, you’ll have the option to accept aid (including loans) through an online platform offered by your school.

what-happens-after-i-fill-out-the-fafsa

How is my federal aid package determined?

Federal aid is awarded based on expected family contribution (and to a lesser extent the cost of attendance at your chosen university). A lower expected family contribution means you’ll get more aid, including subsidized loans and possibly a Pell Grant for low-income students.

The expected family contribution accounts for four variables:

  • Student’s income (and spousal income for independent students)
  • Student’s non-retirement assets (and spousal income for independent students)
  • Parent’s income (for dependent students)
  • Parent’s non-retirement assets (for dependent students)

Parents and students can shelter a limited amount of their income and assets from the EFC. The sheltering limits change each year, and they are published within the FAFSA application.

Students are expected to contribute 50% of their income after sheltering. They are expected to contribute 20% of nonsheltered assets to their educational expenses. Students cannot shelter as much income or net worth as parents.

Parents are expected to contribute 22% to 47% of income after sheltering. They are expected to contribute 12% of nonsheltered assets.

Using the EFC and an expected cost of attendance, the U.S. Department of Education appropriates funds. The FAFSA4caster will help you determine your current EFC and an expected aid package based on current costs of attendance. This is a useful tool for students who are more than one year out from starting college.

Full-time students with an EFC less than $5,200 can expect to receive a Pell Grant worth between $600 and $5,185.

Students who demonstrate financial need (those with a cost of attendance greater than their expected family contribution) will be eligible for either direct subsidized or direct unsubsidized loans. Both loans for undergraduate students have an interest rate of 3.76%. Graduate students will pay 5.31% on their direct unsubsidized loans.
The federal government places limits on direct borrowing. The limits are in the table below. If you need to borrow more money, you will have to look to federal PLUS Loans (higher interest rates), private loans, or covering educational expenses through other means.

Year Dependent Student Limit Independent Student Limit
First Year Undergraduate $5,500 (up to $3,500 subsidized) $9,500 (up to $3,500 subsidized)
Second Year Undergraduate $6,500 (up to $4,500 subsidized) $10,500 (up to $4,500 subsidized)
Third Year + Undergraduate $7,500 (up to $5,500 subsidized) $12,500 (up to $5,500 subsidized)
Undergraduate Student Total Limits $31,000 (up to $23,000 subsidized) $57,500 (up to $23,000 Subsidized)
Graduate Students N/A $20,500 (unsubsidized only)
Graduate Student Total Limits N/A $138,500 (up to $65,500 in subsidized loans). Aggregate amount includes totals from undergraduate studies.

How can I maximize my federal aid?

You must use accurate information when you complete the FAFSA. However, careful planning and understanding the FAFSA can help you maximize your aid. Keep these steps in mind as you apply for aid.

Avoid common FAFSA errors

It’s easy to make errors when you’re filling out a 100+ question application, and the wording on the FAFSA can be unclear. These are mistakes to avoid.

  • Factor deductions out of your adjusted gross income (AGI): Questions 36 and 85 on the FAFSA ask for adjusted gross income.
    • A lot of people forget to take out their deductions when they report AGI. Your AGI should not include contributions to certain retirement accounts, contributions to a health savings account, or college tuition, fees, or student loan interest (with limitations). Use these directions to be sure you’re using the right numbers.
  • Some income from work is sheltered: Questions 39, 40, 88, and 89 ask about income earned from work.
    • This is not the same as your adjusted gross income. The FAFSA uses this number to determine how much of your income can be sheltered. The more income you earn from work, the more you can shelter. Use these formulas to list the correct number.
  • Understand the value of your investment assets: Questions 42 and 91 request the value of your investment assets.
    • Don’t include retirement accounts or educational accounts. The value of real estate should factor in debt (and your personal home should be excluded). Cash value in life insurance policies are not considered investment assets.
  • Your business and farm values are likely zero: Questions 43 and 92 ask for the value of investment farms or small businesses.
    • Most families will have a value of zero. Unless you employ more than 100 employees or your family has less than 50% of the voting rights, you don’t need to declare this. Likewise, farms can be excluded if you live and work on the farm.

If you’re not sure, what a question means, use the guide Completing the FAFSA to understand the definition. The wording of questions leads a lot of people to overestimate their EFC.

In addition to avoiding errors, careful planning can help you reduce your EFC and maximize your aid.

Reduce your assets

One of the best ways to reduce your EFC is to reduce the assets that you declare on the FAFSA. You can do this without destroying your wealth. These are a few options to consider.

  • Pay down consumer debt (reduces available cash).
  • Don’t cash out a life insurance policy.
  • Carry debt on rental properties rather than a personal house (your personal house isn’t an asset that the FAFSA considers, but rental properties are).
  • Accelerate needs-based purchases (reduces cash for spending you would have done otherwise).
  • Contribute money to retirement accounts.

Reduce your income

Smart income planning will help keep your EFC low. These are a few ideas that can help reduce the amount of income counted on the FAFSA.

  • Ask grandparents to delay financial help until the last year of school. Gifts from relatives are untaxed income that need to be declared on the FAFSA. The last year of school won’t appear on the FAFSA, so a gift in the last year goes a long way.
  • Avoid realizing capital gains (selling a rental property or a brokerage account) until the last year of college. Capital gains cannot be sheltered, and they are counted toward income. Most families should not realize capital gains during the college years to avoid FAFSA penalties.
  • Contribute to a pre-tax retirement plan like a 401(k) or a Traditional IRA.
  • Contribute to a health savings account.

Increase your ability to shelter income and assets

The FAFSA allows families to shelter some portion of their income and assets. Taking full advantage of these shelters may lead to more aid. These are a few things to consider.

  • Parents with small businesses should hire their students for up to $6,400 worth of work. This reduces parents’ income by $6,400 and increases the student’s income up to the sheltered amount for dependent students.
  • Parents of dependent students should keep assets in their name. Dependent students have to contribute 50% of available assets as opposed to 12% of parents’ available assets.
  • Delay college until independence. Students who get married or wait until age 24 to start college will not have to consider their parents’ income or assets.
  • Invest more in the family farm or business. A family farm or family business can help you build wealth, and you don’t have to declare these on the FAFSA.

Avoid high-cost strategies

Some families get tricked into high-cost strategies that don’t pay off. These are a few that you should avoid.

  • Don’t take out a whole life insurance policy. A whole life insurance policy reduces your available cash, but it comes at a high commission cost. Don’t bother purchasing one unless you actually want whole life insurance coverage.

Don’t try to shelter assets in a trust. A trust where you or your child is a named beneficiary needs to be declared on the FAFSA. It’s difficult to get around this. Unless you have a specific need for a trust, don’t create one.

How can I use FAFSA to plan for college costs?

The FAFSA is not a college-cost planning tool, but you can use other tools to plan for upcoming college costs. College Navigator offers free information on current college costs. Using it with estimated aid from the FAFSA4caster will give high school students a good idea of their aid options. You could also consider using a paid tool like EFC Plus for an easier college-planning tool.

Parents and students looking to keep student loan debt low will benefit from using the Family Budget Analyzer, which can help you find places to cut expenses. A college cost projector will help you know the costs that your family needs to cover. Sallie Mae also offers a long-range planning calculator that can help you estimate your total indebtedness upon college graduation.

Understanding the FAFSA is one small part of planning for college costs. It will pay for you to understand it, but federal aid is just one component of the college-planning picture. Most students will need to devote time to finding a cost-effective education and applying for grants and scholarships to supplement federal aid.

TAGS:

Health, How to Complain, Life Events

Here’s Everything You Should Know About Term Life Insurance

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Shot of a group of people warming up outdoors

The majority of healthy Americans can use term life insurance policies to get sufficient coverage in place for anywhere from $15 to $100 a month. Most (85%) American consumers believe that most people need life insurance, but just over 60% carry a policy. Even among those who carry a life insurance policy, the amount covered is frequently not enough.

Term life insurance is a low-cost way for individuals with financial dependents to meet those people’s needs even after death. But it can be confusing to understand what it is and what it covers.

When to Consider Life Insurance

Anyone who has a financial dependent should consider buying life insurance if they don’t have the assets available to cover their dependent’s financial needs in the event of their death.

There are five major events that create financial dependence and may justify the purchase of life insurance. These events include:

  1. Taking on unsecured debt with a co-signer
  2. Taking on secured debt with a co-signer
  3. Marriage
  4. Having a child
  5. Moving to a single income

How Much Life Insurance Do I Need?

Term life insurance is the cheapest form of life insurance, but carrying too much life insurance is a waste of money. The exact amount you decide to carry will depend on your risk tolerance and the size of your financial obligations. In this article we offer rules of thumb that can help you calculate the financial loss associated with your death.

Most life insurance companies and brokers also offer life insurance calculators, but these calculators rely on averages. Since each person’s situation is different, it can be valuable to create an estimate on your own.

Unsecured debt with a co-signer

If you’ve taken on unsecured debt (like student loans) with a co-signer and you don’t have sufficient cash or investments to cover the debt, then consider purchasing life insurance in the amount that is co-signed. The beneficiary of this policy should be the person who co-signed the loan with you.

For example, if your parents have taken out $50,000 in loans via a Parent PLUS Loan or private loans, then you should take out a $50,000 policy with your parents as the beneficiaries. In most cases involving unsecured debt with a co-signer, a short term (such as 10-15 years) will be the most cost-effective option for covering this debt.

Secured debt with a co-signer

Secured debts (like a mortgage or a car loan) have some form of capital that could be sold to pay off most or all of the loans, but you still might want to consider taking out life insurance for these types of debts.

While your co-signer can sell the asset, pay off the debt, and become financially whole, that may not be the right choice for your situation (especially if the co-signer is your spouse).

For example, a couple that takes out $200,000 for a 30-year mortgage may decide to each take out a $200,000, 30-year term life insurance policy. This policy will allow either spouse to continue to live in the house in the event of the other’s death.

Marriage

Marriage isn’t a financial transaction, but it brings about financial interdependence. In the event of your death, the last thing you want your spouse to be concerned about is their finances.

Couples without children who both work aren’t financially dependent on each other, but many people would still like to provide their spouse 1-3 years’ worth of income in life insurance to cover time off from work, final expenses, and expenses associated with transitioning houses or apartments.

A couple who each earn $40,000 per year, and who have $20,000 outside of their retirement accounts, can consider purchasing life insurance policies between $20,000-$100,000 in life insurance to provide for the other’s financial needs in the event of their death.

Having a child

Because children are financially dependent on their parents, parents should carry life insurance to cover the costs of raising their children in the event of a parent’s death.

The estimated cost of raising a child from birth to 18 is $245,000, so it is reasonable for each parent to carry a policy of $100,000-$250,000 per child. It is especially important to note that stay-at-home parents should not neglect life insurance since their death may represent a big financial loss to their family (manifested in increased child care costs).

The beneficiary of this life insurance policy should be the person who would care for your child in the event of your death. Sometimes this will be your spouse, but sometimes it will be your child’s other parent, or a trust set up in your child’s name.

If a couple has two children under age 5, and $50,000 in accounts outside of retirement, then each parent should have between $150,000 and $450,000 in life insurance. Parents of older children may choose to take out smaller policies or forego the policy altogether.

Income dependence

If your spouse is dependent upon your income to meet their financial needs, then it is important to purchase enough life insurance to care for their immediate and ongoing financial needs in the event of your death. If you are the exclusive income earner in your house or if you co-own a business with your spouse that requires each of you to play a role that the other cannot play, then your death would yield a tremendous financial loss for several years or more.

In order to estimate the size of policy needed in this situation, there are a few guidelines to consider. According to the well-respected Trinity Study, if you invest 25 times your family’s annual expenditures in a well-diversified portfolio, then your portfolio has a high likelihood of providing for their needs (accounting for inflation) for at least 30 years. A policy worth 25 times your annual income, less the assets you have invested outside of retirement accounts, is the maximum policy size you should consider.

Many people choose to take out even less than this because their spouse will eventually choose to return to work. A second rule of thumb is that the total amount of life insurance for which your spouse is the beneficiary should be worth 10-12 times your annual income. A policy of this size would reasonably provide money to pay for living and education expenses (if your spouse needs to re-train to enter the workforce) for many years without damaging your spouse’s prospects of retirement.

Based on these rules of thumb, if you earn $100,000 and your family’s expenses are $70,000 per year, and your spouse is a stay-at-home parent, then you should have enough life insurance to pay out between $1 million and $1.75 million (remember to subtract the values of any other policies or non-retirement assets above when calculating this amount).

How to Shop for Life Insurance

After deciding on the amount of insurance you need, and the terms you need, you can start shopping for the best policy for you. Although it’s possible to shop around for the best insurance, MagnifyMoney recommends that most people connect with a life insurance broker. For this report, every quote received from a broker was within a few cents of the quote received directly from the insurance company.

If you tell a broker exactly what you want, they can pull up quotes from a dozen or more reputable companies to get you the most cost-effective insurance given your health history. This is especially important if you have some health restrictions.

People with standard health (usually driven by high blood pressure or obesity, or many family health problems) may find some difficulty finding low rates, but brokers can help connect them with the right companies.

People with “substandard health” because of obesity, high blood pressure, or elevated cholesterol, those suffering from current health issues, or people recently in remission from major illnesses will not qualify for term life insurance.

Top Three Life Insurance Brokers

  1. PolicyGenius – PolicyGenius is an online-only broker with an easy-to-use process and helpful policy information. Users give no contact information until they are ready to purchase a policy. PolicyGenius’s system saves data, so users don’t have to re-enter time and again. It is very easy to compare prices and policies before applying.
  2. Quotacy – Quotacy is an online-only life insurance broker with connections to more term life insurance companies than most other life insurance companies. Quotacy offers quick and easy forms to fill out, and they do not require that you give contact information until you are ready to purchase a policy. Unfortunately, they do not fully vet out the policies, so you may need to ask an agent questions before completing a purchase.
  3. AccuQuote – AccuQuote is an online-based brokerage company that specializes in life insurance products. Unlike the online-only brokerage systems, their quotes are completed through a brokerage agent via a phone call. People who prefer some human interaction will find that AccuQuote emphasizes customer service and offers the same price points as online-only competitors.

Top Life Insurance Companies

For those who prefer to shop for life insurance without the aid of a broker, these are the top five companies to consider before purchasing a policy. Each of these companies allow you to begin an application online though you may need to connect with an agent for more details (including a rate quote).

To be a top life insurance issuer, companies had to offer the lowest rates on 30-year term insurance for preferred plus or preferred health levels, and be A+ rated through the Better Business Bureau.

  1. Allianz – Allianz offers the lowest rates for both Preferred and Preferred Plus customers, but they do require you to contact an agent or a broker for a quote.
  2. Thrivent Financial – Thrivent Financial offers the lowest rates for Preferred Plus customers, but they require you to contact an agent before they will confirm your rate.
  3. American National – American National offers among the lowest rates with Preferred and Preferred Plus customers, and they work closely with all major online brokers. You must contact an agent to get a quote directly from them.
  4. Banner Life Insurance (a subsidiary of Legal & General America) – Banner Life Insurance offers an online quote portal and very low rates for Preferred Plus customers. They also seem to be a bit more lenient on the line than other customers for considering Preferred Plus (not considering family history).
  5. Prudential – Prudential offers an online quote portal and the lowest rates for Preferred customers.

What to Expect Next

After you’ve decided to purchase an insurance policy, the policy will need to undergo an underwriting process. This will include a quick medical examination (height, weight, blood pressure, urine sample, and drawing blood) that usually takes place in your home. After that, the insurance companies will need to collect and review your medical records before issuing a policy for you.

Underwriting typically takes 3-8 weeks depending on how complete your medical records are. The company will then issue you a policy, and as long as you continue to pay, your policy will remain in effect (until the expiration of the term). Once your policy is in effect, you can rest easy knowing that your financial dependents will be taken care of in the event of your death.

 

TAGS:

Featured, Health

Health Care Sharing Ministries Surge in Popularity, MagnifyMoney Analysis Shows

Advertiser Disclosure

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

melanie
Melanie and Matthew Moore of Wake Forest, N.C., turned to Samaritan Ministries, one of the largest health care sharing ministries in the U.S. when they needed health coverage.

In 2013, Melanie and Matthew Moore were facing a bit of a health care cost crisis. After the birth of their first child, the Wake Forest, N.C., couple decided that it made sense for Melanie, 33, to leave her job and become the primary caregiver at home. Not only did that mean losing an additional income source, but it also meant giving up the family’s affordable health benefits.

The monthly premium for a family plan through Matthew’s employer far exceeded the reach of their newly reduced budget. Melanie began researching health insurance options online, and eventually landed on the home page for Samaritan Ministries. East-Peoria, Ill.-based Samaritan is one of the six major faith-based health care sharing ministries in the U.S.. Members of these ministries pay monthly contributions to a pool of funding that is dispersed among members as they show need.

Samaritan coverage for Melanie and her son cost just $300 per month — less than half what they would have paid for a family health plan through Matthew’s job. Melanie quickly signed them up. To keep costs as low as possible, they decided Matthew, 31, would continue to receive individual coverage through his employer, which was free.

Even more than the price tag, Melanie says she appreciated the ministry’s faith-based approach to health care. “Health sharing promotes the Biblical ideals of sharing,” she told MagnifyMoney. “It takes a whole different mindset than insurance.”

The Moore family is not alone. As health care expenses have ballooned over the last decade, health care sharing ministries have gained in popularity as a lower cost alternative to traditional insurance. Their numbers still pale in comparison to people who receive insurance through employers or the federal marketplace. But health care sharing ministries have experienced an explosion in interest in recent years.

Membership among the top four health care sharing ministries nearly tripled in just the last two years — from a reported 274,000 members in 2014 to more than 803,000 Americans in 2016, according to a MagnifyMoney analysis of membership rates at the top six ministries. Even the smallest ministry in the bunch, Altrua, saw an eight-fold surge in membership in the last year alone — from 1,000 in early 2016 to 8,000 as of November 2016.

But what exactly are health care sharing ministries, and can they really replace primary health insurance?

At a glance, health care sharing seems like a perfect solution to families facing rising premium costs. However, a deeper look shows that participants take a leap of faith when they eschew traditional insurance protections in favor of health care sharing ministries. MagnifyMoney took a deeper look at how they work.

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How Health Care Sharing Ministries Work

Ministry members pay a monthly share to the health care sharing ministry. Monthly share costs can be as low as $21 for an individual, but they can be as much as $780 per month for a family. Share costs vary from ministry to ministry and can also change unexpectedly, much like traditional insurance premiums.

In terms of actual functions, most health care sharing ministries collect monthly shares online, and they disburse funds electronically or through checks. Not all the share money goes directly to helping people in need. Some of the money goes to cover administrative costs, and some money goes to an escrow account. The escrow accounts allow ministry participants to share costs even during periods of high expenses.

Submitting claims

When members incur medical expenses, they submit their bills to the ministry board for approval. Some health care sharing ministries allow medical providers to send bills directly to the ministry. The board then approves or denies sharing. When cost sharing is approved, the member is paid in one of two primary ways: Either the ministry disburses funds to those in need directly, or the ministry directs other members to send their monthly premium payments to the member in need instead.

Health care sharing ministries encourage members to pray for sick members and to send encouraging letters or emails to those in need. Health care sharing ministries specifically publish medical needs to members of the community for the purpose of prayer and encouragement.

“You almost can’t compare sharing to health insurance,” says Dale Bellis, executive director of Liberty HealthShare. “Sharing is about giving not receiving. Your goal is to be available for others in need. Participating is motivated by faith in God and faith in one another.”

The “individual responsibility”

Before covering a cost, some health care sharing ministries require that members meet an “individual responsibility requirement.” Basically, this is their form of a deductible. The individual responsibility can cost from $35 per incident all the way to $5,000 per incident. For example, Samaritan Ministries requires members to cover up to $300 per incident. Medi-Share requires members to pay a non-reimbursable fee of $35 per medical visit or $135 for an emergency room visit (much like a co-pay).

Negotiating bills

One of the benefits of participating in a health care sharing ministry is that many ministries emphasize the importance of negotiating medical expenses. It’s in the ministry’s interest to encourage members to negotiate fees, which leaves all the more money in the pool for everyone else. Some ministries hire third-party firms to negotiate bills, but it’s up to members to take advantage of those services.

Altrua Healthshare directly negotiates on behalf of its members, according toRon Bruno, VP of Business Development.

To incentivize members to negotiate their bills, some ministries offer to waive the member’s individual responsibility portion.

For example, Melanie negotiated a discount at the birth center when she had her second child in 2016. The discount she received more than covered her individual sharing responsibility of $300. That meant 100% of her expenses were covered by Samaritan.

Who can benefit the most from health care sharing ministries

At their heart, health care sharing ministries are meant to help members who are facing unusually high or unexpected health care costs. To that end, most ministries do not cover the kinds of routine preventative care — like annual physicals and immunizations — that private insurers are required to cover. Commonly “shared” expenses among ministry members are things like sudden illness or surgeries, says Michael Gardner, a spokesperson for Medi-Share.

In a way, health care sharing ministries have replaced catastrophic health plans that were phased out under the Affordable Care Act. People who may not require regular doctor’s visits but who want a health plan for emergency health care needs might benefit from a health care sharing ministry.

Finding a doctor

For the most part, ministry members are free to choose primary care doctors of their choice. This is because health care sharing ministries don’t usually share the cost of preventive care. The exception, Altrua HealthShare, has a network of affiliate providers including primary care physicians.

The trouble with choosing “any” doctor is finding a primary care physician who will accept patients who pay in cash. Samaritan Ministries directs their members to use a “cash and direct pay” resource from the Association of American Physicians and Surgeons.

Outside of primary care physicians, each health care sharing ministry allows members to request sharing pre-approval for planned surgeries and other expensive procedures. Most ministries have established processes or arrangements that help their members find the most cost-effective surgeons and specialists in their area.

For example, Liberty HealthShare maintains a list of providers who negotiated bills and accepted payments from Liberty in the recent past. Medi-Share has members search databases for preferred medical providers.

Even with these resources, members are free to find their own doctors, and they will still be eligible for sharing (as long as they follow the standard procedures set forth by the ministry).

When it comes to emergency care, ministry members use the best available option and submit their bills for sharing afterward. The health care sharing ministries will seek to honor requests to share even expensive emergency care (provided the emergency care meets their standards).

Health Care Sharing Ministries vs. Insurance Companies

It’s crucial to understand that health care sharing ministries are not insurance companies. They operate more like nonprofit organizations. And because they are not technically insurance companies, they have no contractual obligation to cover certain medical expenses. That means they can mostly write their own rulebook for what they will cover and what they won’t.

Each health care sharing ministry has full discretion over which treatments it will cover, and ministries will not cover many treatments or conditions that do not align with their religious ideals. For example, many ministries won’t cover treatment for drug or alcohol addictions. Medi-Share, for example, will typically not cover prenatal care for an unmarried woman or health care for children born to unwed mothers. These are costs that traditional insurers would cover without hesitation.

There are also limits to how much health care sharing ministries are willing to cover. The majority of ministries have a maximum sharing amount of $125,000-$1 million per incident. In contrast, government-approved health insurance plans do not have annual or lifetime maximums for insurance coverage. That’s not to say that these ministries can’t absorb large costs. Samaritan Ministries participants share $18 million per month in medical costs. Currently, Liberty HealthShare has a sharing capacity of $6 million per month among 30,000 households. Medi-Share and Christian Healthcare Ministries have shared more than $1 billion each.

Health care sharing ministries do not cover preventive care, which is largely required of most traditional insurers. Members pay out of pocket for annual physicals, birth control, routine immunizations, and even preventive cancer screenings. In contrast, preventive care benefits are covered without cost sharing in approved health insurance plans.

When Health Care Sharing Ministries Don’t Make Financial Sense

melanie
Melanie Moore, 33, decided to remove her infant daughter from her Samaritan health care ministry plan because the plan did not cover her newborn well visits. She continues to use the ministry for her own health benefits.

Because these ministries don’t cover routine health costs, health care sharing ministries make sense for people with low routine health care costs. In general, this includes many healthy people who don’t struggle with chronic conditions.

One surprising group that needs to look out for high routine costs are new parents.

In early 2016, Matthew and Melanie Moore gave birth to their second child. After the birth, the Moores chose to enroll the children on Matthew’s insurance plan instead of keeping them on the Samaritan plan, which wouldn’t cover any of their newborn well visits.

Infants visit the doctor 9-10 times in their first 18 months, and they receive dozens of immunizations during that time. For the Moores, the out-of-pocket costs for preventive care would have overwhelmed their budget again.

Faith (Almost Always) Required

Health care sharing ministries have been around since the 1980s, led by Christian Healthcare Ministries. Like Melanie and her family, most health care sharing ministry participants are drawn to the organizations’ emphasis on faith.

The organizations model their sharing plan after resource sharing ideals practiced by the early Christian church nearly 2,000 years ago.

All the health care sharing ministries require that their members affirm some set of beliefs. Most specifically, they require participants to adhere to the Christian faith. Liberty HealthShare is an exception, according to Bellis. “We are unabashedly a Christian organization, but we don’t intrude on the faith choices of participants,” he says.

Bruno, of Altrua Healthshare, explained that members of Altrua adhere to a statement of standards instead of a statement of beliefs. The standards are based on the Bible, but the ministry is non-denominational.

One reason Melanie Moore loves health care sharing ministries is the sense of community and encouragement she receives from other members. She received notes of congratulations and prayers for recovery when she received checks to pay for her child’s delivery. Likewise, she sends notes of encouragement along with her monthly share check.

All the health care sharing ministries encourage participants to pray and give words of encouragement to sick participants. The ministries exist to foster community and to promote sharing. Anyone looking for an impersonal experience will need to look elsewhere.

Each of the ministries is faithful to its heritage. These ministries are faith-centered, and they want to promote religious faith among their members. It is clear that these ministries want members to share more than medical bills. They want to promote a community of care among their members.

Health Care Sharing Ministries in the Obamacare Era

Under the guidelines of the Affordable Care Act, health care sharing ministries would never pass muster. But five of the six large health care sharing ministries were granted exemptions under the ACA — meaning their members will not have to pay tax penalties for not having qualified health coverage.

Please note: Members of Medical Cost Sharing (MCS), another ministry, will not receive qualified exemptions from Affordable Care Act penalties. Their website uses language that may lead you to believe otherwise.

The Bottom Line

Walking the line between faith and finances hasn’t been easy for the Moore family. Melanie is still a member of Samaritan, but the rest of the family is on Matthew’s traditional insurance plan.

Like the Moores, anyone considering a health care sharing ministry should think about their mindset, their faith, and their finances. Don’t join a ministry because of the low monthly costs; the organizations want members who live out the belief statements. Be sure that the rewards of joining a ministry (both financial and otherwise) outweigh the associated risks.

*This post has been updated to reflect the following correction: Due to a reporting error, the name of the ministry used by the Moore family was incorrectly noted. It is Samaritan Ministries, not Medi-Share.

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Featured, Health

6 Health Benefits You Should Never Have to Pay For

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The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

child and doctor talking in clinic

Since the passage of the Affordable Care Act, most insurers must now provide preventive benefits without any form of cost sharing. And yet, millions of Americans are still missing out on free (and potentially life-saving) preventative health care services, like flu shots and cancer screenings.

If pocketbook concerns are keeping you from taking care of your health, take a second look. You may find that the preventive services you want are covered without cost to you.

Free benefits — Really?

Of course, it’s misleading to call preventive benefits completely free. You pay for them in the cost of your health insurance premiums. But you may as well use these benefits because, after all, you’re already paying for them. Recent studies show that preventive benefits may save 2 million lives and $4 billion dollars annually.

Furthermore, the ACA doesn’t guarantee free preventative treatments for 100% of insured people. Some insurance plans were given a pass on providing preventative services if they were implemented before March 2010. In 2016, 23% of workers who receive benefits through their employer are enrolled in a grandfathered plan and may not receive full free preventive benefits.

There is also the risk that medical providers may bill patients for services that should be free. Those types of errors are caused when medical billing offices unwittingly bundle covered and uncovered services, when your bill contains an error, or when your insurer errantly denies a claim.

Office visits and preventive services are often billed separately. This means you may receive a legitimate bill even when you thought you were going to receive free care. The only way to avoid this conundrum is to ask for costs in advance. You may also be billed if you use an out-of-network provider.

Below, we cover the preventive benefits you can expect to receive for free, and the times that they may lead to unexpected medical bills.

Benefits for adults

Preventive benefits for all adults fall into six categories. Some benefits are limited to at-risk groups or women only. Before you use a preventive benefit, ask your doctor if you qualify for free screenings. If you don’t, you will have to pay a bill.

Some preventive services will be built into an annual physical, but you can request the services as you need them.

Remember, the preventive service is free, but you may need to pay for ongoing treatment if you uncover a health problem.

Cancer Screenings:

  • Breast cancer screening (mammogram)
  • Cervical cancer screening (pap smear)
  • HPV screening (pap smear)
  • Skin cancer counseling
  • Colorectal screenings (fecal occult blood testing, flexible sigmoidoscopy, colonoscopy)
  • Lung cancer screening (tomography)

Insurers (except grandfathered insurers) cannot impose an extra charge for polyps removed during a colonoscopy. They also cannot charge for medically necessary anesthesia.

Treatment for Chronic Conditions:

  • Screening for the following diseases: abdominal aortic aneurysm, diabetes (blood glucose), hypertension (blood pressure), hepatitis B, hepatitis C, latent TB infection, liquid disorders, osteoporosis
  • Depression screening
  • Low-dose aspirin (adults with cardiovascular or colorectal disease risk factors)

Except obesity management and prescribed aspirin, you must pay for chronic condition treatments through your insurer. This means treating chronic conditions will include cost sharing.

Many chronic condition tests require a blood or urine sample. If your doctor is worried about your health, they may test for multiple uncovered diseases. In that case, you can expect to pay a fee for lab work.

You may also see a charge if a medical biller uses the wrong medical billing codes. If you end up with an unexpected bill, request an itemized bill and an explanation of benefits. You will see on the bill if any you have fees associated with the covered screening. When you see fees for covered screenings, call your doctor to have them adjust the bill. You can also ask your insurer to adjust the claim for you.

Free Health Promotion Treatment

  • Alcohol misuse
  • Obesity screening and management
  • Diet and activity counseling for cardiovascular disease prevention
  • Falls prevention (adults 65+)
  • Tobacco cessation
  • Well-woman visits
  • Intimate partner violence screening and counseling

Initial counseling and tobacco cessation pharmaceuticals are covered at 100%, but your doctor may recommend therapies and counseling not covered by insurance. Be sure to ask if counseling will be billed as a preventive benefit.

Free Immunizations

All immunizations recommend by the Advisory Committee for Immunization Practices (ACIP) must be covered as preventative benefits. This includes over 20 types of immunizations including the annual flu shot.

If you aren’t sure whether an immunization will be covered by your insurance, ask your doctor before you agree to the immunization.

Sexual Health Treatment

  • Screening tests for chlamydia, gonorrhea, syphilis, HIV infection
  • STI counseling
  • HIV counseling
  • Contraceptive services

Insurers must cover the lowest cost version of 18 unique forms of birth control. Treatment for sexually transmitted diseases or infections is not covered as a preventive benefit.

Lab work for sexually transmitted diseases that are not listed will cost extra. Request cost estimates for all tests and screenings even if they are part of your standard wellness visit.

Pregnancy Treatments

  • Anemia, bacteriuria, gestational diabetes, HIV, hepatitis B, syphilis screening
  • Depression screening
  • Folic acid supplements
  • Preeclampsia preventive medicine
  • Tobacco cessation behavioral cessation support
  • Breastfeeding counseling, supplies, and support

Obstetricians commonly ask for tests outside of those listed above. You should expect to pay lab fees for those tests. Most obstetricians can provide clients with a list of routine pregnancy tests and associated costs. In addition to lab fees, you should expect to pay for ultrasounds, labor and delivery fees, and facility fees during your pregnancy and birth experience.

Benefits for Children

Preventive benefits for children are more robust than preventive services for adults. Nearly all procedures provided during scheduled well-child visits will be covered as preventive services. This includes regular checkups, screenings for childhood diseases and disorders, and immunizations.

If your child provides a blood or urine sample you may want to ask about lab fees, but all other services will be free.

Children at risk and sexually active adolescents can receive all the preventive benefits that adults receive in addition to those specific to children.

Regular well-child visits will make it easy for you and your child to take advantage of any preventive benefits available to you.

Final word: Don’t neglect preventive benefits

Preventive coverage can help you catch and cure otherwise deadly diseases. Curing early-stage diseases often costs less than later-stage treatments, and early treatments may save your life. Recent studies show that preventive benefits may save 2 million lives and $4 billion dollars annually.

These services come with no additional cost sharing to you. Take advantage of preventive coverage; you can’t afford to neglect your health.

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Health

Guide to Enrolling in an Obamacare Plan on Healthcare.gov

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Desperate young couple with many debts reviewing their bills. Financial family problems concept.

Health insurance protects millions of Americans from paying full price for their medical expenses. But buying the right insurance isn’t an easy task for people looking to sign up for an Obamacare plan through the federal health insurance marketplace (Healthcare.gov). This year, the average consumer will have to wade through 30 unique plans from several different insurers to make their choice.

In this guide, we will cover the facts that you need to know when selecting an insurance plan through the federal health care exchange.

What terms should I know before I apply?

Understanding basic health insurance terminology can help you make a more informed decision about your options. These are the common terms you should know.

obamacare 2017

Health care costs

Monthly premiums. The amount you pay each month for your health insurance.

Deductible. The amount you pay for covered health services before your insurer begins to cover part of your costs.

Out-of-pocket maximum/limit. The highest amount you will pay for covered services in a year.

Co-insurance. Your share of the costs of a covered health care service. This is the percentage you must pay out of pocket after you have met your annual deductible. You pay a specific co-insurance amount until you meet your out-of-pocket maximum.

Co-payment. A fixed amount you pay for a covered medical service, typically when you receive the service or prescription.

How these costs work together. Consider a scenario where you purchase an individual insurance policy with a $368 monthly premium, a $2,000 deductible, 20% co-insurance, and a $5,000 out-of-pocket maximum.

You will pay $4,416 in monthly premiums ($368 every month).

If you receive a $20,000 medical bill, you will pay:

  • $2,000 to cover your annual deductible (100% of costs up to $2,000)
  • $3,000 in co-insurance (20% of costs over $2,000 deductible until you hit your out-of-pocket maximum of $5,000)
  • $0 in medical costs after you hit your out-of-pocket maximum (in this case the additional $15,000 is covered by your insurance)

Total annual cost:

$5,000 to cover medical bills + $4,416 in monthly premiums = $9,416

Plan Types

Metal Levels. The health care exchanges — both federal and state-run exchanges — classify health insurance plans into four metal categories. The levels are bronze, silver, gold, and platinum. Metal categories are based on how you and your plan split the costs of your health care.

Bronze. Bronze plans offer the least amount of estimated coverage. Insurers expect to cover 60% of health care costs of the typical population. These plans feature the lowest monthly premiums, the highest deductibles, and high out-of-pocket maximum expenses.

Silver. Silver plans offer moderate estimated coverage. Insurers expect to cover 70% of health care costs, and plan members cover the remaining 30%. If you qualify for cost-reduction subsidies, you must purchase a silver plan to access this extra savings. In 2014, 67% of people who were eligible for a subsidy chose a silver plan.

Gold. Gold plans offer high levels of estimated coverage. Insurers expect to cover 80% of health care costs, while plan members cover the remaining 20%. These plans feature high monthly premiums, but lower deductibles and out-of-pocket maximums.

Platinum. Platinum plans offer the highest level of protection against unexpected medical costs. Insurers expect to cover 90% of medical costs, and plan members cover the remaining 10%. These plans have the highest monthly premiums and the lowest deductibles and out-of-pocket maximums.

EPO: Exclusive Provider Organization. Medical services are only covered if you go to doctors, specialists, or hospitals in the plan’s network (except in an emergency).

PPO: Preferred Provider Organization. You pay less for medical services if you use the providers in your plan’s network. You may use out-of-network doctors, specialists, or hospitals without a referral. However, there is an additional cost.

POS: Point of Service. You pay less for medical services if you use providers in the health plan’s network. You need a referral from your primary care doctor to see a specialist.

HMO: Health Maintenance Organization. These plans focus on integrated care and focus on prevention. Usually coverage is limited to care from doctors who work for or contract with the HMO. Generally, out-of-network care isn’t covered unless there is an emergency.

Provider Network. Most insurance plans have preferred pricing with a group of health care providers with whom they have contracted to provide services to their members.

Cost Savings

PTC: Premium Tax Credit. The federal subsidy for health insurance that helps eligible individuals or families with low or moderate income afford health insurance purchased through a health insurance marketplace.

APTC: Advance Premium Tax Credit. This credit can be taken in advance to offset your monthly premium costs. The subsidy is based on your estimated income and can be taken directly from your insurer when you apply for coverage. You must repay credits if you qualify for a smaller subsidy once taxes have been filed. You can learn more about repayment limitations here.

Cost Reduction Subsidies. If you earn between 100% and 250% of federal poverty line, you may qualify for additional savings. This extra savings reduces your out-of-pocket maximum, and it offers assistance with co-pays and co-insurance.

Individual Mandate (Tax Penalty). If you can afford to purchase health insurance and choose not to, you will be charged an individual shared responsibility payment, in the form of a tax penalty. There are a few qualified exemptions, but if you don’t meet those, you will be fined.

For the 2016 tax year, the individual mandate will be calculated two ways:

  • 2.5% of household income (up to the total annual premium for the national average price of the marketplace’s bronze plan)or
  • $695 per adult and $347.50 per child (up to $2,085)

You are responsible for the greater of the two.

Catastrophic Plans. People under age 30 or with hardship exemptions may purchase catastrophic health insurance plans. These plans offer very high deductibles (over $6,850) and high out-of-pocket maximums. Catastrophic plans may offer savings above the metal grade plans, but you can’t use a premium tax credit to reduce your monthly cost.

Preventative Care. All health insurance plans purchased through the health care exchange cover some preventative care benefits without additional costs to you. These benefits include wellness visits, vaccines, contraception, and more.

Government Health Plans

Medicaid. A joint federal and state program that provides health coverage to low-income households, some pregnant women, some elderly, and people with disabilities. Medicaid provides a broad level of coverage including preventative care, hospital visits, and more. Some states provide additional benefits as well.

Medicaid Expansion. The Affordable Care Act (ACA) gives each state the choice to expand Medicaid coverage to people earning less than 138% of the federal poverty line. The primary goal of the ACA is reducing the number of uninsured people through both Medicaid and the health insurance marketplace. The Kaiser Family Foundation keeps track of expanded Medicaid coverage by state.

CHIP: Children’s Health Insurance Program. This program was designed to provide coverage to uninsured children who are low income, but above the cutoff for Medicaid eligibility. The federal government has established basic guidelines, but eligibility and the scope of care and services are determined at the state level. Your children may qualify for CHIP even if you purchase an insurance policy through the health care exchange. You can learn about CHIP eligibility through the marketplace or by viewing this table at Medicaid.gov.

Who can buy insurance through a health care exchange?

family in debt

Since the introduction of the Affordable Care Act (ACA), most Americans can purchase health insurance through a health care exchange. However, incarcerated people and those living outside the United States cannot purchase insurance through the marketplace.

Most long-term, legal immigrants to the United States may purchase insurance. Healthcare.gov maintains a comprehensive list of qualified immigration statuses for purchasing insurance through the marketplace.

Just because you’re eligible to purchase insurance through the health care exchange doesn’t mean it’s the most cost-effective. That’s why it’s important to weigh all available health insurance options.

Will I qualify for a health care subsidy?

One major factor to consider when weighing the options is your expected subsidy. 85% of people who purchased insurance through a health care exchange qualified for a health insurance subsidy. The subsidy, or premium tax credit, brought average monthly premiums down from $396 to $106.

To qualify for a subsidy, you must meet three standards:

  1. You must not have access to affordable insurance through an employer (including a spouse’s employer).
    1. Affordable insurance for 2017 is defined as individual coverage through an employer that costs less than 9.69% of your household’s income.
    2. You can check that your insurance offers minimum value coverage by having your human resources representative fill out this form.
  2. You must have a household Modified Adjusted Gross Income between 100% and 400% of the federal poverty line.
    1. You can calculate Modified Adjusted Gross Income using this formula:
      Adjusted Gross Income (Form 1040 Line 37) +
      Nontaxable Social Security benefits (Form 1040 Line 20a minus Line 20b) +
      Tax-exempt interest (Form 1040 Line 8b) +
      Foreign earned income and housing expenses for Americans living abroad (Form 2555)
  1. You’re not eligible for coverage through Medicaid, Medicare, the Children’s Health Insurance Program (CHIP), or other types of public assistance. Some states have expanded Medicaid to anyone who earns up to 138% of the federal poverty line.

How can I calculate my subsidy?

The easiest way to calculate the subsidy you will receive is to use a subsidy estimator from Healthcare.gov or the Kaiser Family Foundation. Both calculators estimate your subsidy based on the information you provide. They also help you understand what factors affect your subsidy estimations.

Your income, household size, and the cost of premiums in your state factor into your subsidy. Premium tax credits can help reduce the amount that you will spend on monthly premiums to a set percentage of your income. This subsidy can bring the marketplace’s silver plan into the affordable range set by the Affordable Care Act.

The price of your silver plan determines the subsidy you receive, but you can use this same subsidy for other plans as well. For example, if you purchase a gold plan, you will spend no more than 9.56% of your income on premiums.

Below you can see the maximum amount you will spend on insurance premiums based on your income.

For an Individual

% of Poverty Line (2016) Income (Based on 2016 Federal Poverty Line) Max Silver Premiums as a Percent of Income Max Monthly Silver Plan Premium Cost after Subsidies Special Notes
100%-138% Lower 48 States:
$11,880-$16,394
Alaska:
$14,840-$20,479
Hawaii:
$13,670-$18,865
2.03%-3.35% Lower 48 States:
$20.08-$45.77
Alaska:
$25.10-$57.17
Hawaii:
$23.13-$52.66
Check if you qualify for expanded Medicaid.
139%-250% Lower 48 States:
$16,513-$29,700
Alaska:
$20,627-$37,100
Hawaii:
$19,001-$34,175
3.41%-8.18% Lower 48 States:
$46.93-$202.45
Alaska:
$58.62-$252.90
Hawaii:
$54-$232.96
You may qualify for cost-reduction subsidies if you purchase a silver plan.
251%-400% Lower 48 States:
$29,819-$47,520
Alaska:
$37,248-$59,360
Hawaii:
$34,312-$54,680
8.21%-9.66% Lower 48 States:
$204.01-$382.54
Alaska:
$254.84-$477.85
Hawaii:
$234.75-$440.17
If you earn more than 400% of the poverty line, you will not qualify for subsidies.

For a Family of Four

% of Poverty Line (2016) Income (Based on 2016 Federal Poverty Line) Max Silver Plan Premiums as a Percent of Income Max Monthly Silver Plan Premium Cost after Subsidies Special Notes
100%-138% Lower 48 States:
$24,300-$33,534
Alaska:
$30,380-$41,924
Hawaii:
$27,950-$38,571
2.03%-3.35% Lower 48 States:
$41.11-$93.62
Alaska:
$51.39-$117.04
Hawaii:
$47.28-$107.68
Children will qualify for CHIP. Check if you qualify for expanded Medicaid.
139%-200% Lower 48 States:
$33,777-$48,600
Alaska:
$42,228-$60,760
Hawaii:
$38,851-$55,900
3.41%-6.41% Lower 48 States:
$95.98-$259.61
Alaska:
$120-$324.56
Hawaii:
$110.40-$298.60
Children in 46 states will qualify for CHIP. You may qualify for extra savings if you purchase a silver plan.
201%-250% Lower 48 States:
$48,843-$60,750
Alaska:
$61,063-$75,950
Hawaii:
$56,180-$69,875
6.45%-8.18% Lower 48 States:
$262.53-$414.11
Alaska:
$328.22-$517.73
Hawaii:
$301.96-$476.31
In some states, children will qualify for CHIP. You may qualify for extra savings if you purchase a silver plan.
251%-400% Lower 48 States:
$60,993-$97,200
Alaska:
$77,383-$121,520
Hawaii:
$70,155-$111,800
8.21%-9.66% Lower 48 States:
$417.29-$782.46
Alaska:
$529.43-$978.24
Hawaii:
$479.97-$899.99
In a limited number of states, children qualify for CHIP up to 375% of the poverty line. If you earn more than 400% of the poverty line, you will not qualify for subsidies.

What circumstances might affect my eligibility for a subsidy?

newborn-baby-wide

Your subsidy can change if your circumstances change. It’s important to plan ahead if any of these special circumstances apply to you.

Families with kids. In most states, if you earn less than 200% of the poverty line, your kids will qualify for the Children’s Health Insurance Policy (CHIP). If your children qualify for CHIP, you cannot purchase subsidized insurance for them, but your individual coverage may still be subsidized.

Families where one spouse has work coverage. Some employers only offer health insurance to their employees. Spouses and children cannot get coverage through work. In that case, you can purchase insurance with a subsidy through the marketplace exchange.

Families with expensive employer coverage. If you can purchase family coverage through your or your spouse’s employer, then you will not qualify for subsidies. The tax code states that if an employee can gain individual coverage for himself or herself for less than 9.69% of total household income, then the insurance is considered affordable. Coverage for the family isn’t factored into the affordability calculation.

The so-called “family glitch” traps 2-4 million people and requires them to pay high prices for premiums. If you are caught in this situation, your children may qualify for CHIP. However, uncovered spouses and children must purchase insurance or pay the individual mandate penalty.

Minnesota Senator Al Franken has proposed a Family Coverage Act that may rectify the tax code, but it has not been passed.

Getting married in 2017. If you’re getting married in 2017, your subsidy depends on your combined income. In the months preceding your marriage, your income is one-half of your and your spouse’s combined income. Once you get married, your subsidy is based on your joint income and your qualifying family.

You need to report a marriage to be eligible for a special enrollment period on Healthcare.gov or your state’s insurance exchange.

Getting divorced in 2017. If you get divorced or legally separated in 2017, you must sign up for a new health insurance plan after you separate. Your subsidy will be based on your income and household size at the end of the year. However, you will need to count subsidies received during your marriage differently than subsidies received when you’re legally separated.

For the months you are married, each spouse divides advanced subsidies received to each new household. If spouses cannot agree on a percentage, the default is 50%. If the plan only covered one taxpayer and his or her dependents, then the advanced tax credits apply 100% to that spouse.

Divorce reduces your income, but it also reduces your household size. These factors change your estimated subsidy in opposite directions. Your subsidy changes will depend on the magnitude of each change.

Reporting a divorce makes you eligible for a special enrollment period. When you enroll in a new plan, the exchange website will help you estimate your new subsidy for the remainder of the year.

Giving birth or adopting a child. You have 60 days from the birth or adoption of your child to enroll them in a health care plan. If you miss this window, your child will not have health coverage, and you will pay a penalty. However, if you enroll your child in a timely manner, you can expect your subsidy to increase.

Report the birth or adoption of a child to be eligible for a special enrollment period on Healthcare.gov or your state’s insurance exchange.

Turning 26. If you’re on your parents’ insurance, generally you can stay until you have turned 26, but you should check your plan to be sure. You will have a 60-day special enrollment period to get your own plan from the health care exchange when you turn 26.

You may also be eligible for a special enrollment period from an employer-sponsored health plan. If you fail to have health insurance for more than three months, you will pay a penalty.

Losing employer coverage. If you lose employer-based health coverage, you can either enroll in COBRA or purchase a plan through the health care exchange. Once you enroll in COBRA, you become ineligible to purchase subsidized coverage through the exchange.

You need to report job status changes to be eligible for a special enrollment period on Healthcare.gov or your state’s insurance exchange.

Changes in income. Premium tax credits are based on your annual income. If you increase your income, you will be expected to pay back some or all of the advanced premium you received. If you earn more than 401% of the federal poverty line, all premiums need to be repaid. If you earn less than 400% of the federal poverty line, you may have to pay back $2,500 of advanced premiums per family or $1,250 for individuals.

You need to report income changes to avoid under- or overpaying your premiums throughout the year.

Moving. Most insurance plans that you purchase through the marketplace are state and county specific. If you move, you need to report the move through the insurance exchange.

Moving may affect your subsidy (if you move to or from Alaska or Hawaii), but it does affect the plans available to you.

How do I apply for insurance?

Applying for insurance takes 30-60 minutes if you have all the necessary information ahead of time. This is what you should gather before you apply:

  • Names, birthdates, and Social Security numbers for all members of the household
  • Document numbers for anyone with legal immigration status
  • Information about employer-sponsored health plans
  • Tax return from previous year (to help predict income)
  • Student loan documents
  • Alimony documents
  • Retirement plan documents
  • Health Savings Account documents

The website interface for the federal exchange is simple, but answering the questions may be confusing. It’s important to fill out the application as accurately as possible so you can enroll in the best health insurance plan for you.

We’ve done our best to clarify the confusing portions in our step-by-step process below.

A note on state-run health care exchanges

Each state has the right to choose whether to run their own health care exchange, or to use Healthcare.gov, the federally run exchange. Seventeen states run their own health insurance exchanges.

The state-run exchanges perform the same functions as the federally run exchange. They allow you to estimate your tax credit and to purchase insurance. As a consumer, you must provide the same information to your state as you would on the federal exchange.

While the online user experience will vary when states adopt their own online marketplace, the Affordable Care Act is a federal law and a federal program. This means that the requirements and benefits do not change from state to state even if the exchange platform changes. If you have trouble navigating either the state or federally run health care exchange, you can get free help from knowledgeable experts.

Family and Household Info

Start the application by filling out contact information and basic information about members of your household. Even if a member of your family will not need coverage, include them in your application.

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The website will help you determine if a member of your household has insurance options outside of the health care exchange. It will also help you determine if a person is a dependent. For the purpose of the health care exchange, your family includes all the people included on your income tax filing.

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You need to know Social Security numbers, birthdates, immigration status, disability status, and whether each household member can purchase health insurance through an employer plan.

Income and Deductions

Next, you’ll estimate your income for the upcoming year. Include all the following forms of income:

  • Jobs
  • Self-employment income (net)
  • Social Security benefits
  • Unemployment income
  • Retirement income
  • Pensions
  • Capital gains
  • Investment income
  • Rental/royalty income
  • Farming and fishing income
  • Alimony received

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Afterward, you’ll enter deductions. The application calls out student loan interest and alimony paid, but you should estimate all “above the line deductions” that should be included. These include:

  • Retirement plan contributions: 401(k), 403(b), 457, TSP, SEP-IRA, simple IRA, traditional IRA
  • Contributions to a Health Savings Account
  • Self-employed health insurance premiums
  • Tuition and fees paid
  • Educator expenses (up to $250 per teacher)
  • Half self-employment tax
  • Moving expenses
  • Early withdrawal penalties from a 1099-INT

Do not double-count income or deductions since you’ll fill out these forms for each person. If you make a mistake, you can edit it when you review your household summary.

Additional Information

Finally, you’ll fill out a few other miscellaneous details that will allow the application to confirm that you are eligible for subsidies or marketplace insurance.

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It’s especially important that you have accurate information about job-related coverage for you and your family. This information will determine your eligibility for subsidies and other government programs.

Completing Enrollment

After you complete the application, you can review and submit it. At this point, the system will suggest which members of your household should complete CHIP or Medicaid applications. The remaining family members can enroll in a health insurance plan.

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How do I decide what plan type is best for me?

Before you choose a plan, you’ll decide whether to receive advanced or deferred subsidies. Most people with predictable income and household size should take most or all of the subsidy upfront. However, if you expect to undergo a major life change (such as an increase in income, a marriage, or a divorce), consider taking less of your subsidy in advance.

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Then you can look for a plan. For people shopping for 2017 coverage, the average number of plans available is 30. Rather than comparing every plan, we recommend creating criteria around the following variables:

  1. Monthly cost. Consider how the monthly premium will affect your budget. This does not mean you should choose the plan with the lowest premiums, but you should consider the price. People without chronic conditions who have adequate emergency savings may consider opting for low monthly premiums.
  1. Deductible and co-insurance. Do you have the emergency fund or income you need to cover a small medical emergency? A broken arm, stitches, or an unexpected infection can lead to hundreds of dollars in medical costs. If you have a high-deductible plan, you’ll need to cover these costs without help from the insurance company. If possible, choose a plan with a deductible that you could comfortably cover out of your savings or income.
  1. Maximum yearly cost. Add the annual cost of your premiums plus your out-of-pocket maximum to determine your maximum yearly cost. In a worst-case scenario, this is the amount you will pay out of pocket. People with chronic conditions that require heavy out-of-pocket fees should try to limit their maximum yearly cost. A plan with a higher maximum yearly cost may represent a higher risk.
  1. Services and amenities. All insurance plans from the marketplace cover the same essential health benefits, but some plans will offer unique services such as medical management programs, vision, or dental coverage. High-deductible health plans allow you to contribute to a tax-advantaged Health Savings Account.
  1. Network of providers. It’s important to be sure that your preferred medical providers contract with the plan you choose. Not every doctor is “in network” with every insurance plan. You can check each plan’s provider directory before you choose the plan.

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Once you determine your criteria, look for plans that fit your needs and ignore the rest.

Using the exchange website, you can filter and sort plans based on these factors. Most people need to balance cost and coverage to find a plan that works for them.

Where do I get help for free?

Due to the complex nature of the marketplace exchange, the exchange provides marketplace navigators. Marketplace navigators are professionals who provide free, unbiased help to consumers who want help filling out eligibility forms and choosing plans. You can find local marketplace navigators through the health care exchange website. Most of the time you can find someone who speaks your language to meet you in person.

Outside of the exchange, nonprofit organizations are working to help people gain coverage by teaching them about their insurance options. Enroll America offers free expert assistance to anyone who makes an appointment with in-person application assistance. You can use the connector below to make an appointment with one of their experts.

Insurance brokers can offer another form of help. Brokers aim to make it easier for consumers to apply for and compare insurance plans. Insurance brokers have relationships with some or all of the insurance companies on the marketplace. Using a broker will not increase the price you pay for a plan, and it will not affect your subsidies. However, online brokers may not have 100% accuracy regarding a plan’s details. It’s important to visit a plan’s website before you enroll in a plan.

If you want to work with a broker, consider some of these top online brokers. PolicyGenius compares all the plans that meet criteria that you establish, and they serve up the top two plans that meet those criteria. HealthInsurance.com makes applications quick and easy, and the site specializes in special enrollment help.

What happens if I don’t apply for insurance?

In most cases, you must enroll in health insurance or you’ll have to pay a penalty.

The penalty for 2017 hasn’t yet been released, but the 2016 penalty was calculated as the greater of 2.5% of your income (up to the national average cost of a bronze plan) or $695 per adult and $347.50 per child (up to $2,085). This steep penalty means that most people will be better off purchasing some health insurance.

However, under certain circumstances you can avoid buying insurance and dodge paying the penalty. These are a few of the most common exemptions:

 

  • Member of a qualifying health care cost-sharing ministry (501(c)(3) whose members share a common set of ethical or religious beliefs and have shared medical expenses in accordance with those beliefs continuously since at least December 31, 1999.
  • Low income, no filing requirement: If you do not earn enough income to file taxes, then you are automatically exempt from paying a noncoverage penalty.
  • Coverage is unaffordable. For 2017, if you cannot obtain individual employer coverage or a bronze plan for less than 9.69% of your income (after applicable subsidies), you may opt out of coverage.
  • Joint individual coverage is unaffordable. For 2017, if you and your spouse combined cannot obtain individual employer coverage or a bronze plan for less than 9.69% of your income (after applicable subsidies), you may opt out of coverage.
  • Short coverage gap (you went without insurance for less than three months).
  • Lived abroad for at least 330 days.
  • General hardships such as homelessness, eviction, foreclosure, unpaid medical bills, domestic violence, and more (exemption must be granted through a marketplace exemption).
  • Unable to obtain Medicaid because your state didn’t expand Medicaid (exemption must be granted through the marketplace).
  • Received AmeriCorps coverage (exemption must be granted through the marketplace).
  • Members of qualified religious sects who do not obtain government benefits (exemption must be granted through the marketplace).

Although you will not pay a penalty, you may still want to seek out catastrophe insurance or some other insurance to help you deal with high potential health costs.

What happens if my plan was canceled?

Recently, some insurers dropped their insurance plans from the health care exchange. As a consumer, you cannot assume that the plan you chose in the past will be around next year. Unlike previous years, you will not qualify for an exemption if your plan dropped in 2017. This means that you may need to purchase new insurance or pay a penalty.

Even if your plan remains in place, important variables like the deductible, the premiums, or the coverage may have changed.

Whether you’re shopping for a new plan, or reviewing an old plan, take these steps before open enrollment ends.

  • Update your personal information on your application. Your income, household size, where you live, and more will affect plan and subsidy eligibility. It’s important to keep your application up to date. The plan that fit you last year may no longer be appropriate, but you won’t know unless you keep the information current.
  • Review your plan before you re-enroll. You should receive a notification in the mail if your plan has been changed or canceled. Take the time to understand if the changes affect you.
  • Compare plans that fit your needs. Consider enlisting free help from a health care navigator, a nonprofit, or a broker to help you decide.
  • Choose the plan that best fits your needs and your budget.

Work to make the most informed decision possible

Choosing a health plan seems like a daunting task, but you can get all the help and information you need to make an informed decision. Your health and your pocketbook matter, and we want to help you protect both.

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