Early Retirees Face Health Care Gap
If you retire too soon you could find yourself in need of affordable health coverage. Here are ways to bridge the gap.
By Cameron Huddleston, Contributing Editor, Kiplinger.com
October 22, 2003
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Money isn't the only reason retirees head back to work, says Michael Furois, a fee-only financial planner in Chesterton, Ind. They are also in search of affordable health insurance. "A lot of folks don't realize the expense," he says.
After a need for money, the need for health benefits was the number-two reason pre-retirees surveyed by AARP said they would work in retirement.
The most at-risk are lower net worth individuals who can't afford individual health insurance policies, but who retire before qualifying for medicare. Financial planner Nancy Flint-Budde tells clients who can't foot the bill for health insurance to put off retirement at least until they turn 63½.
What makes that the magical age? COBRA, the Consolidated Omnibus Reconciliation Act.
COBRA gives people who have retired, resigned or been laid off the right to keep group health insurance for up to 18 months. If you retire at 63½ you can continue on your former employer's COBRA policy until medicare kicks in at 65.
Charming the COBRA
Federal law requires most employers who have 20 or more workers to offer COBRA benefits (church plans are exempt). Firms with fewer than 20 employees may be subject to COBRA-like requirements under state law.
In most circumstances, you can buy up to 18 months of continuing coverage. Some states let you keep your benefits longer. Also death, divorce or a legal separation from a spouse may trigger a longer benefit period. Entitlement to medicare may also qualify your dependents for extended COBRA benefits once you lose health care coverage at work (usually up to 36 months).
Because you're buying at group rates, COBRA is less expensive than buying insurance on your own, but it's not cheap. You must pay the entire premium plus an administration fee of up to 2% -- for a total of 102% of what your employer's plan coverage costs.
Making it to medicare
Once you reach 65 you qualify for medicare, the health insurance offered by the federal government (medicare is also available to younger people with disabilities). If you are getting social security benefits or railroad retirement benefits, you are automatically signed up for medicare. If not, you can sign up by calling or visiting your local Social Security Administration office.
But keep a close eye on the calendar. There are very specific times when you can sign up for the government coverage: three months before your 65th birthday, the month of your birthday or the three months after your birthday. It's best to sign up before your birthday.
When you sign up, you are enrolled in medicare Part A, which covers hospital bills. Most people don't pay a monthly premium for Part A. However, if you want coverage for doctors' visits, you will have to sign up for Part B and pay a $54 monthly premium. If you wait to sign up for Part B, your premium could go up 10% for each year you could have had Part B coverage.
You can also choose to supplement medicare to fill gaps in coverage. So-called "medigap" policies are offered through the private sector. To qualify for a medigap policy you must be enrolled in Part A and B. You have a six-month window after signing up for Part B to enroll in medigap. If you don't sign up during this period, you could be denied coverage or charged more for a medigap policy.
Finding insurance on your own
Although COBRA is expensive and medicare has its shortcomings, they are a sure thing. You can be turned down for an individual policy or pay higher premiums if you have health problems. That's why finding insurance on your own can be so daunting.
If you've been covered continuously by a group plan for at least 18 months and have used up your COBRA or similar state-continuation benefit, you have the right under federal law to buy the policy of your choice from a company selling individual health insurance, and your coverage must be effective immediately. But if there are gaps in your coverage, you lose this right.
Buying Your Own Health Insurance will help you find a policy you can afford when you're on your own.
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