Health insurance options for early retirees

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Health insurance is one factor that makes many people wary of retiring before age 65.

Employers usually pay well more than half of health insurance premiums. Retiring before you’re eligible for medicare at 65 may result in paying much more for coverage. However, early retirees often have several coverage options and you may be able to find a health plan that doesn’t result in paying much more for insurance.

Here are the details about your potential choices and how to choose a plan:

Go on your spouse’s employer-sponsored plan

A spouse’s employer-sponsored health plan may be your best option.

Employers generally subsidize a large part of the premiums for their employees and their dependents –– the average employer pays about 75% of the premiums for family coverage.

If you’re thinking about going on your spouse’s plan:

Find out how much the premiums will increase
The deductibles and cost-sharing costs
Whether your doctors take the health plan

You can only be added to your spouse’s coverage at certain times during open enrollment or during a special enrollment period if you have a qualifying event, such as losing other coverage.

“Loss of group coverage is generally a qualifying event,” says Alan Silver, senior director of health and benefits for Willis Towers Watson, a benefits consulting firm.

In that case, you may be added to the policy in the middle of the year, similar to the special enrollment period for a new spouse or the birth of a child, he says. Ask your spouse’s employer about the rules and timeframe for when you have to sign up and when coverage takes effect.

If you don’t join your spouse’s plan during the special enrollment period, you may need to wait until the employer’s open enrollment period, which is often in the fall.

Employer-sponsored health plan for retirees

In the past, employers were more apt to offer retiree health insurance to former employees. But that coverage is becoming rare.

“The number of employers offering coverage, either on an unsubsidized or subsidized basis, has been steadily declining to a point where the large majority of private employers do not offer employer-sponsored coverage to pre-65 retirees at this point in time,” says Silver.

Some public employers and a few private employers still offer early retiree coverage, and they may or may not subsidize the premiums. If the coverage is subsidized, it may be a good option to consider.

“But if the coverage is truly unsubsidized (sometimes referred to as ‘access only’) or the program is tailored to pre-65 retirees alone, there’s a good chance that the employer program is more expensive than both the marketplace and active COBRA since both leverage a risk pool that includes more than just pre-65 retirees,” he says.

Continue your employer’s health insurance through COBRA

COBRA is a federal law that requires employers to let former employees continue their group health insurance coverage for up to 18 months after they leave jobs. This law applies to companies with 20 or more employees, but most states have similar laws for smaller employers.

This coverage is usually the easiest. You keep the same provider network and coverage and any expenses you already paid toward the annual deductible still count. But the premiums can jump significantly because the employer no longer subsidizes part of the cost.

Employers generally pay about 80% of individual employees’ premiums, leaving them to pay just 20%. But if you continue coverage on COBRA, you’ll have to pay 100% of the costs yourself (plus up to 2% in administrative costs).

For example, the average employee pays $1,243 for single coverage, but the average employer pays $6,227 of the cost, according to the Kaiser Family Foundation’s Employer Health Benefits Survey. However, former employees who continue coverage through COBRA would have to pay the full $7,470 in premiums themselves.

COBRA could be a good solution if you’re in the middle of treatment and don’t want to have to change your doctors or if you’ll be turning 65 soon and just need coverage for a short time until you’re eligible for Medicare.

Individual health insurance

You can buy health insurance on your own through individual health insurance, too. The Affordable Care Act prohibits insurers from rejecting you or charging more because of pre-existing conditions, which can be particularly helpful for people in their 50s or early 60s who may have health conditions, such as diabetes and high blood pressure.

These individual policies come in four levels:

Bronze plans have the lowest premiums but the highest deductibles and cost-sharing.
Silver plans have lower deductibles than Bronze plans, but higher premiums. They also have lower premiums than Gold and Platinum but more out-of-pocket costs than those plans.
Gold plans have lower deductibles than Bronze and Silver, but lower premiums than Platinum.
Platinum plans have the highest premiums but the lowest out-of-pocket costs and deductibles. There aren’t many Platinum plans, so you may have trouble finding one.

Buying coverage on your own can be expensive for early retirees. The health plans are age-banded, so premiums for someone in their 60s can be up to three times as high as they are for someone in their 20s. However, if you buy coverage on your state insurance marketplace or Healthcare.gov, you may qualify for a subsidy that can reduce your premiums significantly.

You’re eligible for a subsidy if your modified adjusted gross income is from 100% to 400% of the federal poverty level, which for 2021 is up to $51,040 if you’re single or $68,960 for a couple. The subsidy can make a big difference in your premiums, especially if your income drops significantly after you retire.

For example, a 60-year-old Los Angeles couple could pay $1,495 per month for a Silver plan in 2021. But if their adjusted gross income is $40,000 for the year, they could qualify for a subsidy worth $1,239 per month, which could bring their monthly premiums down to $256 for a Silver policy or $0 for a Bronze policy, according to the Kaiser Family Foundation’s subsidy calculator.

The subsidy is based on your estimate of your total income for the current year. If you end up earning more than expected, you may have to pay back some of the subsidy when you file your income tax return. If your income ends up being lower, you could get an extra refund.

If your income is less than 250% of the federal poverty level, you may qualify for an extra subsidy to help cover your deductibles and cost-sharing (called a “cost-sharing subsidy”). Your modified adjusted gross income must be less than $31,900 if single or $43,100 for a couple in 2021 to qualify for this subsidy.

Choosing health insurance when you’re an early retiree

When choosing a policy, don’t just look at premiums. Also, compare deductibles, copayments and other out-of-pocket costs.

Make sure the doctors and hospitals you want to use are included in the plan’s provider network. Find out what your co-payments would be for your medications. For example, you may have a $20 co-payment for preferred brand-name drugs, but you may have to pay 40% of the cost for non-preferred brand-name drugs.

“When looking at any retiree medical plan, a participant needs to balance three things — premium cost, out-of-pocket exposure and network,” says Silver. “Generally, there are tradeoffs between the three. And pre-65 retirees usually need to give something up — either their desire for a lower premium, or their dream of having rich coverage with small copays, or their doctors and hospitals.”

For example, if you have access to group coverage, your premiums may be higher, but you may have a better plan with a broader network than you would have with an individual policy.

“For retirees willing to shop and look at their options, the individual market could provide lower-cost plans (depending on where they live) if they are amenable to a restricted network of hospitals and doctors,” he says.

Kimberly Lankford

Contributing Researcher

Kimberly Lankford has been a financial journalist for more than 20 years. She received the personal finance Best in Business Award from the Society of American Business Editors and Writers. She also has written three books: “The Insurance Maze: How You Can Save Money on Insurance – and Still Get the Coverage You Need” “Rescue Your Financial Life,” and “Ask Kim for Money Smart Solutions.”