Many people dream of retiring early, but few are able to make that dream a reality thanks, in part, to costs associated with health insurance coverage. Medicare benefits kick in at age 65, but one must fill the gap in between. And if there is a younger spouse or dependent in the equation, they likely won't be covered by Medicare at all.
The Patient Protection and Affordable Care Act (PPACA), also known as the Health Care Reform Act, has changed the playing field somewhat; however, its provisions will take several years to be fully effective. So what can you do to find affordable care in the interim?
- Enroll in the working spouse's group plan. This is probably the most common and least expensive way for a retired spouse to obtain health insurance. Note that:
- Some companies offer family coverage for domestic partners.
- There may be a limited time in which to enroll.
- Qualify for retiree health insurance with your current employer. Employers seldom subsidize the cost of retiree health insurance, but such coverage still may be less expensive than an individual policy. If it's available, be aware that:
- Premiums can increase.
- Benefits can change.
- Employers can discontinue coverage.
Determine whether the coverage will replace or supplement Medicare. Missing the enrollment date for Medicare could be an expensive oversight.
- Continue group health insurance under the federal Early Retiree Reinsurance Program (ERRP). The new ERRP reimburses employers a percentage of the premiums for group insurance for retirees age 55 or older, their spouses, and their dependents. Be aware that the federal subsidies for the employer do not automatically reduce the retiree's premium cost.
- Elect COBRA benefits. Retirees and their dependents may be eligible for continued employer benefits under COBRA. COBRA mandates that employers with 20 or more employees must continue group health insurance for terminating employees for a period of time. The number of months someone can retain group insurance coverage depends on the state. At a minimum, retirees can continue their coverage for an additional 18 months, but at an unsubsidized cost.
See the Kaiser Family Foundation website, www.statehealthfacts.org, for more information about states' COBRA extension laws and guaranteed insurance protections.
- Buy a state-sponsored guaranteed health insurance plan. These are called HIPAA-eligible plans or high-risk pools, depending on the program the state offers. Under PPACA, states must offer insurance coverage for qualified residents, regardless of preexisting conditions. By 2014, uninsured retirees who make too much to qualify for subsidized health plans will be able to buy coverage, regardless of health, through private insurers via a state-sponsored insurance exchange.
The cost for state-sponsored guaranteed health insurance will be higher than insurance purchased through private insurers.
- Start a small business or work part-time. Some states require insurers to offer group plans to the self-employed. Small group plans are usually more cost-effective and offer better benefits than most individual health insurance contracts. If starting a business is unrealistic, retirees may get health insurance through part-time work.
- Buy an individual insurance plan. Because premiums frequently increase along with age and health complications, insurance purchased from a private insurer is the retiree's most expensive option, if he or she can qualify at all.1
High-deductible plans combined with a Health Savings Account are becoming an increasingly popular solution. These plans usually have a $5,000 to $10,000 deductible with a limit on out-of-pocket costs. Be sure to read the fine print and understand what expenses meet the deductible.
Estimating your future medical costs is challenging for several reasons:
- Medical and drug costs are growing at a rate higher than inflation.
- Long-term costs due to individual medical conditions are hard to predict.
- Longevity is hard to pinpoint and may be a tough topic to come to terms with.
Your best move is to work with a financial professional to determine what may be appropriate for you. With proper planning, the ability to retire early may be more than just a dream.
1 After 2013, insurance companies cannot deny applicants due to preexisting conditions.