Though the standard age for retirement is 65, only 64% of people age 55
to 64 are employed. The other 36%, not yet eligible for Medicare, either
have to be married to someone with employer
health insurance or have to scramble to find coverage. The
scrambling is occasioned by two things. One is that, even for healthy
people, medical insurance is fearsomely expensive. Employers have seen
their costs climb 63% over the last four years, says personnel
consultant Towers Perrin, and will spend an average of $14,500 next year
on
health insurance for a family of four. The other is that individuals
trying to buy
health insurance on their own confront a difficult marketplace whose
providers don't particularly want their business, especially if they
have a preexisting medical problem.
COBRA
If you lose or quit your job, by law you will be entitled to continue to
participate in your employer's group health benefits plan, at your own
expense, for 18 months. The benefit is called Cobra after the federal
law that mandated this option. "Choose this only as a very last resort,"
says Paul Zane Pilzer, author of The New Health Insurance Solution (John
Wiley & Sons, 2005). "It is expensive and it is temporary. If you
develop a health condition while on it, you could be prevented from
getting permanent affordable
health insurance."
So, use Cobra to tide you over while you hunt for a long-term solution.
What you need is an individual (as opposed to a group) policy that is
guaranteed renewable. This means that if you develop cancer later, the
insurer can't throw you out. However, you probably can't get in if you
have cancer or any other costly ailment when you apply.
This is what James Smith, 55, did two years ago after he and his wife,
Sei Yuen Chak, 55, left jobs at a printing company. They continued under
their former employer's policy, which had a monthly premium of $1,012 to
cover them and a dependent nephew, 14, while searching for a new plan
with lower premiums. Through the Web site of Ehealthinsurance in
Mountain View, Calif. they found a Blue Cross/Blue Shield of California
plan at $790 a month. It's not a deluxe plan: This "preferred provider"
deal steers them to doctors that they might not have picked on their
own. But buyers of
health insurance can't be too picky these days.
Individual Policies
The strategy for most early retirees is similar to that ultimately used
by the Smiths--buying an individual
health insurance policy, if you are healthy enough to qualify
for a reasonable rate. That means normal blood pressure, no diabetes, no
cardiovascular disease, no cancer and so on. You will be examined by an
insurer-approved physician.
Most people considering early retirement should stop participating in
their group
health insurance plan, if they have one, when they are healthy, says
Pilzer. Instead, buy your own policy. Your employer might chip in toward
the cost (some employers give cash rewards to employees who opt out of
the company plan after showing evidence of alternative coverage). You
will still be paying out of pocket, but the investment is worthwhile if
it gets your foot in the door. Canceling your policy based on health
status is prohibited in the majority of states as long as you pay your
premium, but the cost can be increased annually to account for inflation
and your age. To keep the premium down, raise the deductible every year,
recommends James Oatman, chief actuary for Assurant Health, an insurer.
"Lock in a base rate when you are young and healthy," says Pilzer.
"Everyone should have an individualhealth
insurance policy. The time to get it is when you don't need it." The
leading issuers of individual health plans are Assurant, Blue Cross/Blue
Shield, Humana, Golden Rule and Aetna.
Preexisting Conditions
A preexisting condition is likely to make a
health insurance policy a lot more expensive (rates potentially
double the standard ones) or simply unobtainable. Some health insurers
may be willing to accept preexisting conditions that others will not,
says Robert S. Hurley, vice president of strategic operations at
Ehealthinsurance. People denied
health insurance coverage because they are sick can usually get a
policy from a state assigned-risk pool.
Thirty-three states have risk pools, with coverage for an individual
ranging in cost from $2,064 a year in Georgia to $11,424 in Indiana.
Most of the rest of the states force insurers to accept all comers,
albeit at stiff rates; an unhealthy individual's rate can be 15% to 200%
higher than a healthy individual's of the same age.
Health Savings Accounts
If you are healthy and thinking of retiring early, consider starting a
health savings account.
HSAs, a new feature of federal tax law, are
coupled to high-deductible health insurance policies. You put
tax-deductible money into the
HSA, same as you would into an IRA (until
age 65). Tax-free withdrawals can be made anytime to pay medical bills,
but your objective is to leave as much money as possible in the account
to compound tax free and be there for medical costs as you get older.
The amount you (or your employer) can put into the account is equal to
the deductible on the insurance policy, up to a ceiling. In 2006 that
ceiling will be $5,450 for a family policy. You will be able to throw in
another $700 a year if you are over 55.
High-deductible plans have another advantage: They tend to be more
lenient when it comes to a preexisting condition, says Hurley of
Ehealthinsurance.
HSAs are very unlike the use-it-or-lose-it flexible spending accounts
that have been around for years. On the contrary, the whole idea is to
save for doctor bills in your golden years. So instead of tapping the
account for a $500 doctor bill today, pay the bill out of other funds
and let the
HSA grow. But hang on to that $500 receipt. Since there is
no time limit on reimbursements, says Pilzer, you can reimburse yourself
out of that account decades later, after the money has compounded tax
free.
Short-term Policies
An early retiree who will turn 65 less than a year later should buy a
nonrenewable short-term
health insurance policy. A nonrenewable short-term
health insurance policy costs approximately 25% of what a renewable
health insurance policy would cost for the same time period, and the
insurer won't be very fussy about your health. If you retire at 63, take
the Cobra plan, then go to a short-term policy that will last you until
you are on Medicare.
One thing is for sure. Going without
health insurance is not an option. Last year more than half of all
personal bankruptcies in the U.S. were prompted by medical problems,
according to a joint study conducted by professors at Ohio University
and Harvard. The revised bankruptcy bill that went into effect in
October will make it even more difficult for families to pursue
bankruptcy to wipe out their medical debts, according to Stuart Gollin,
head of the bankruptcy and solvency practice at accounting firm Weiser
Llp.
The bottom line is simple, warns Gerry T. Smolka, senior policy adviser
at AARP's Public Policy Institute: "If people don't think and plan
ahead, they may find themselves with some nasty surprises."
Related Reading:
Health Quote
Insurance Suggestions
Retiree Health
Insurance
Are you
Underinsured?
Dental Discount FAQ
2006 HSA Update
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