Retiring early — it's an American dream. The difficulty in finding affordable health insurance is forcing many people to delay that dream.

People may choose to retire before age 65 — the point at which they become eligible to receive Medicare — under a variety of circumstances. Some have stable finances and their employers offer retiree health benefits. Others, with or without employer-sponsored health insurance, retire when they're forced out of the labor market due to poor health, or when they lose their jobs.

Early retirees often face limited health insurance options. What if your employer doesn't extend health benefits to retirees? What if you retire and you can't afford an individual health insurance policy because the premiums are based on your age and health status? What if you have retiree health insurance but your former employer goes out of business?

These are all scenarios to contemplate before you retire. Early retirees have the following health insurance choices:

• Continue employer-sponsored health insurance if available.
• Purchase an individual health insurance policy.
• Elect continued coverage under COBRA.

Continuing employer-sponsored health insurance

First, investigate whether your employer offers health insurance coverage as a benefit for early retirees. Be aware that employers differ widely when it comes to eligibility requirements (age and tenure rules), benefit levels (deductibles, co-payments or services covered) and premiums (whether the employer shares in any of the costs or you bear the entire financial burden).

Even if you're eligible for early retiree health benefits, your coverage is likely to be less generous than it was when you were working. Make sure you know exactly what services your retiree health plan covers and for how long. Will it cover you up to age 65? Does it have a prescription drug benefit? How much will your premiums increase?

Also, find out if the policy has a lifetime maximum cap on those benefits. The expenses resulting from one heart attack or stroke — including hospitalization and outpatient physical therapy — could easily exceed a $500,000 cap.

Alternatively, you could join your spouse's employer-sponsored health plan if your spouse will continue to work. Perhaps that plan is more cost-effective and offers better coverage. Whether you choose your employer's retirement health plan or your spouse's group health plan, find out under what circumstances your plan can be cancelled. Will you have the option to convert it to another health plan, perhaps an individual plan where you pay the entire premium? Remember your premium payment will likely rise each year. (See Your rights when your health plan changes.)

If you're not eligible for group health insurance through your employer or your spouse's company, you might enroll in a group plan sponsored by a fraternal organization or professional association such as AARP.

Individual health insurance

If you don't have access to a group health plan, you can purchase individual health insurance. The premiums for individual policies are based on your age and your medical history in many states. (Some states mandate "community ratings" where age and health aren't pricing factors.) In many states, health insurers that consider you a bad risk can decline your application or sell you coverage that excludes your pre-existing health conditions. In some states, such as New Jersey and New York, you can buy guaranteed issue policies, where you cannot be turned away.

Don't let high premiums tempt you to go without health insurance. A catastrophic illness could devastate you both physically and financially.

The COBRA option

Another option as an early retiree is to purchase coverage under COBRA, the Consolidated Omnibus Budget Reconciliation Act. Under COBRA, if you work in a company with 20 or more employees and have group health insurance through that employer, you're eligible to continue your health benefits for 18 months after retirement. It won't be cheap: You’ll likely pay 102 percent of the group rate. Even so, it might be a cheaper than buying individual health insurance. (Read Know your COBRA rights.)

Federal and state assistance programs

If you can't afford COBRA or individual health insurance premiums, you might qualify for health insurance under Medicaid. That’s the joint federal and state program that pays for health care for low-income families with children, low-income seniors and disabled people.

Medicaid varies from state to state: Each state establishes its own eligibility standards and decides the type, amount, scope and duration of services. States might also require you to pay nominal deductibles, co-insurance or co-payments for certain services. Some states also have a "medically needy" program, in which Medicaid eligibility is extended to higher-income people who have high medical costs.

If poor health is forcing you to retire early, you might eventually be eligible for health insurance under Medicare. If you are under 65, you can get premium-free Medicare if you have been a disabled beneficiary under Social Security or the Railroad Retirement Board for more than 24 months. You should apply at the Social Security Administration office as soon as you become disabled.

Your state also might have a high-risk health insurance pool. This is usually your last resort if you have a pre-existing condition for which you can't obtain individual coverage. Your state department of insurance can provide information on its high-risk health pool, if available, and eligibility requirements.

Whatever type of plan you consider, look carefully at the exclusions, limitations and your out-of-pockets expenses, like co-payments. Investigate the plan's prescription drug benefits and how much you'd have to pay out of pocket for medicine.

For some, the transition from work to retirement can bring unforeseen and upsetting changes. If you do your homework, your health insurance doesn't have to be one of them.