8/20/2012 2:15 PM ET|
How early retirees insure their health
Reader response to columns I recently wrote on early retirement was strong and overwhelmingly positive.
But amid all the praise for these folks who shucked their shackles early, many of you had the same query:
"What do they do about health insurance?"
It's a good question. Americans typically can't get Medicare until they're 65. Most employers don't provide health benefits to retirees, particularly those who duck out in their 40s.
Getting insurance on your own, though, can be expensive -- the average annual premium for a family is now more than $12,000. And that's if you can get coverage at all. Most states don't force insurers to cover individuals outside employer or group plans, so even relatively minor health problems can make it hard to get coverage in many states.
(While health care reforms signed into law in 2010 include changes that lower the costs of buying insurance on your own, that piece of the legislation hasn't taken effect yet.)
Going without insurance is risking financial ruin. A single accident or illness can result in six-figure bills and easily wipe out the nest egg you hoped would carry you through retirement.
Stay healthy and take a big deductible
Many of the early retirees I interviewed were fortunate: They're in good health, so they were able to purchase high-deductible insurance policies on their own. This coverage requires them to pay most health-care costs out of pocket, but it protects against catastrophic expenses.
Some combine a high-deductible policy with a health savings account, which allows them to put aside pretax money to pay medical costs.
When I last spoke with them, Fred Ecks and Ann Haebig, of South San Francisco, Calif., each had individual policies with a $4,000 deductible. Ecks was paying $104 a month for coverage that excluded dental coverage while Haebig was paying $131 for a plan that included dental services.
Both said they believe in the importance of prevention. They boasted of eating organic food and working out regularly. Ecks, who was once 100 pounds overweight, became an ultramarathon runner. Haebig said she felt a lot healthier since she switched from full-time to part-time work.
"I'm less stressed generally, which I think also helps," Haebig said.
The Bennett family of Purcellville, Va., told me they had a $10,000 deductible as well as a higher monthly premium: $700. The policy included maternity benefits, which some high-deductible policies don't, and the coverage came in handy during Mary Bennett's pregnancy with her younger son when complications required her hospitalization.
"On the one occasion when we faced a true emergency," said Rob Bennett, "the insurance covered what we couldn't cover on our own."
If your health isn't perfect . . .
The Bolons of Cedar City, Utah, had a rougher time finding adequate insurance. For the first two years of their early retirement, insurers refused to cover Brad because of a previous bout with cancer.
After Brad had been cancer-free for seven years, the Bolons were able to get a family high-deductible plan -- but the annual premiums were more than $14,000, the deductible ran to $8,000, and many of Brad's health issues were specifically excluded from coverage.
"We have coverage for the family, with major, gaping holes," said Janine Bolon, adding that the family has tried to keep health expenses down by negotiating discounts with providers for paying cash.
There are other approaches for getting coverage if your health isn't so great:
Through a spouse or domestic partner. This can work if one-half of the couple is content to keep working at an employer with benefits or has one of the rare plans that cover retirees.
The Scardas of New Jersey told me they were covered thanks to Gina Scarda's 20-year tenure at the New York Police Department. Tom Scarda could have had similar benefits through his previous job at the Metropolitan Transit Authority but would have had to work 30 years to get them. Instead, he quit the job after 14 years to operate a franchise and consult.
"Part of the decision-making process was that Gina would have to stay with the NYPD (for 20 years, the minimum to get retiree benefits) and that would give us health benefits for life," said Tom Scarda.
Through an association or small-group plan. Some trade and professional associations offer group plans to their members, although the number has dwindled as health-care costs have spiraled. If you run a small business, you may be able to get a group plan without exclusions. A few states require insurers to offer small-group plans to the self-employed.
Through high-risk pools or HIPAA eligibility. Some states have government-run coverage of last resort for people who can't find private insurance. And in all states, so-called "HIPAA eligible" individuals must be offered coverage, said physician and financial planner Carolyn McClanahan, but the path to get there is long and expensive -- and so, too, may be the premiums should you eventually get coverage.
HIPAA refers to the Health Insurance Portability and Accountability Act of 1996. To be HIPAA-eligible, you must have had at least 18 months of continuous insurance coverage, with at least the last day of coverage being under a group health plan. (Find out more about HIPAA here.)
Then you typically must exhaust your benefits under federal COBRA rules, which give you another 18 months of coverage for which you must pay the full premium, plus a 2% administration fee. This is no small expense.
Or you can move. One state, Vermont, not only requires insurers to cover individuals who don't have group-health plans, said McClanahan, but also requires insurers to charge everyone the same premiums.
If you're considering early retirement, spend some time researching your options and your state's health-insurance coverage laws. The Kaiser Family Foundation's state health data website summarizes the relevant rules by state. Also, consider consulting an experienced insurance broker who can help you evaluate your alternatives and get you through the application process.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
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