Navigating your health insurance options as you approach retirement can be very complicated. Health care can be one of the most expensive costs for retirees, so failure to plan ahead could lead to mistakes that can cost thousands. Most people are not eligible to claim Medicare until they are 65 years old, leaving early retirees with a gap in coverage if they leave their jobs before that time. Fortunately, there are a handful of options available to help bridge this gap. This article will explore some of those options, so you can reduce your healthcare costs and retire knowing you won't get stuck with catastrophic medical expenses.
As always, we recommend that you speak with an advisor or consultant prior to making any decisions.
Spousal Coverage
If your spouse is still working, then one of the easiest and likely cheapest ways to get health insurance coverage is through their plan, if the option is available. It’ll probably require the least amount of research, since you may already be familiar with the coverage, you may still receive subsidies from your spouse's employer which will cut down costs, and you won’t have to worry about whether your income will affect your tax credits like you would if you were on an ACA plan.
COBRA
Next up is COBRA. Thanks to the Consolidated Omnibus Budget Reconciliation Act of 1985, or COBRA, you can remain on your former employer’s health plan for up to 18 months after retirement. This is a simple option that doesn’t require much time or effort.
Normally, you’ll receive paperwork explaining your coverage and the costs shortly after you leave the company, and all you have to do is send it back or notify them of your election within a specified period of time, generally 60 days. Another benefit of COBRA is that you can use HSA dollars to pay your premiums, providing a tax advantage and reducing your out-of-pocket costs.
The downside of COBRA is that it can be expensive. You’ll probably be on the hook for the full cost of your insurance premiums, as it is unlikely your former employer will continue picking up part of the cost. You may not be able to get coverage for your spouse or family as well. Lastly, with only 18 months of coverage, you may end up needing to find another option once your coverage ends.
ACA Marketplace Plan
One of the more affordable options for health insurance may be found on a state or federal insurance exchange established after the passage of the Affordable Care Act, or ACA. Depending on your income level, you may be eligible for subsidies that reduce the cost of your premiums.
This is a prime example of why planning ahead is critical. If you end up with a large taxable transaction in a year you are enrolled in an ACA plan, you may lose your subsidy and have to pay it back come tax time. But if you plan ahead and are able to delay or accelerate the transaction, you may be able to preserve some or all of your subsidy.
Short-Term Medical Plan
Another option that you could look into are short-term medical plans. These are temporary health insurance options, typically lasting 3-12 months, designed to cover basic medical needs like doctor visits, emergencies, or hospitalizations. They are significantly cheaper than ACA marketplace plans, making them attractive for healthy early retirees who need affordable coverage before Medicare kicks in.
However, there are some notable risks to be aware of. They are not ACA-compliant, often excluding essential benefits like preventive care, maternity, or mental health services, and may not cover pre-existing conditions. High deductibles and coverage limits can also leave you exposed to significant out-of-pocket costs, and availability varies by state.
Health-Sharing Plan
A much less common option is a health sharing plan. These are programs offered by organizations where members pool their monthly premiums or “share amounts” to cover medical expenses. For healthy individuals, these may be significantly more affordable than traditional insurance.
Again, there are some carry significant risks that require careful consideration. They are not regulated like insurance, meaning there’s no legal guarantee that medical bills will be paid, and coverage can be denied based on plan-specific rules, such as exclusions for pre-existing conditions, lifestyle choices (e.g., smoking or alcohol-related issues), or non-covered treatments like mental health services or elective procedures.
Plans may also impose annual or lifetime caps on payouts, leaving members vulnerable to catastrophic costs. Additionally, enrollment can involve strict eligibility criteria, such as adherence to religious or ethical guidelines, and disputes over unpaid claims can be harder to resolve due to limited legal recourse
Private Insurance
One of the more expensive options is to purchase a private insurance plan through an agent or broker. You’d likely have a lot of plan options, but you won’t be eligible for premium tax credits.
If you are relatively healthy, you may be able to sign up for a High-Deductible Health Plan (HDHP), which comes with lower premiums but higher deductibles and copays. Another benefit of a high deductible plan is that you can contribute to your HSA. Your contributions can reduce your taxable income, grow tax-free, and then be used for qualified healthcare expenses down the road. Just be aware: you cannot contribute to the HSA within a 6-month period prior to Medicare, or you may have to pay penalties, so keep this in mind if you are getting close to Medicare age.
If you have any questions, please feel free to reach out at nick@slaytonlewis.com.