Health Care Options for Early Retirees -- Before Medicare Begins

Those who have health insurance from their employer are entitled to COBRA or continuing coverage when they retire. However, this coverage usually expires within 18 months of early retirement (36 months in some cases). So for example, if you retire at age 58, your health insurance will run out before age 60. And in case your health is not very good, replacement coverage could become very expensive or unobtainable.

The early retiree heath care options vary among states. But by becoming familiar with the choices you may have will help you manage this critical element of retirement planning.

• Apply for Individual Coverage.

  Premiums could be very high. Fortunately, under Obamacare, preexisting conditions are not longer and issue and everyone is insurable.

• Examine Higher Deductibles.

  Increasing deductibles to an amount you can comfortably afford to reduce monthly premiums and increase the odds a policy will be issued.

• Purchase Catastrophic Insurance.

  These policies are intended to pay only for major hospital and medical expenses, not routine visits to the doctor's office or trips to the emergency room. A catastrophic plan covers expenses such as treatment in an intensive-care unit for 10 days after an auto accident, a heart attack, or a stroke.
  Catastrophic health insurance policies typically come with a very high deductible from $500 to $15,000 and a high maximum benefit payment, starting at $1 million and rising from there.

• Go Back to Work.

  Many retirees work at least part-time just for the employer health care benefits - not a bad idea.

• Apply to the State’s High-Risk Pool.

  Several states have pools, but the insurance can be 150% to 200% higher than the average premium on individual policies for healthy applicants. Still, state coverage can be an option for a client who has been denied coverage or can’t stomach private policy premium increases.
  To qualify, a state resident must have been rejected by an insurer, have a catastrophic or serious medical condition, or be insured by a policy that has premiums higher than the pool’s. Nevertheless, it’s important to investigate the pool’s policies and requirements. Some states have very low lifetime benefit caps. Others have a stringent preexisting lockout period, some as long as a year.
  For more information on high-risk pools including which states offer them, visit the National Association of Health Underwriters’ website at: .

• Find an Association-Based Plan.

  There are roughly 15,000 associations in the U.S. today, including such groups as the local Chambers of Commerce, the American Automobile Association, the National Rifle Association, and the Sierra Club. Following the AARP model, some associations have decided to offer health insurance to their members, using an established insurance company to write the policies.

• Set Up a Health Savings Account.

  HSAs can work well in conjunction with individual, high-deductible policies. (To qualify as a high deductible policy, the policy must have a deductible for 2014 of at least $1,250 for individuals and $2,500 for families.)  With such a plan, IRS allows you to deposit funds into a health savings to a maximum of $3,300 for individuals and $6,550 for families on a tax deductible basis (plus $1,000 for those age 55+). The insured can then use this money to offset deductibles, co-payments, and uninsured treatments. If the insured never taps the money, it can be used for long-term care insurance needs or even retirement.

Contributions to HSA accounts are tax-deductible, even if you do not itemize deductions on your tax return.  The earnings within the accounts grow tax-free, and the distributions are tax-free as long as they are used for qualified medical expenses.

Qualified medical expenses include:

• Diagnosis, cure, mitigation, treatment or prevention of disease
• Prescription drugs
• Qualified long-term care services and long-term care insurance
• COBRA premiums

Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty may be waived in certain circumstances.

Consult with an experienced senior health insurance agent on these options to see if an HSA would prove beneficial.

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