Learn what the differences are between group, individual and short term health insurance as you consider your options.
Many people dream of early retirement, but the reality of actually doing it involves some additional logistics. For one, if you plan on retiring before you qualify for Medicare, then you will need to consider how to obtain health insurance in the meantime.
Medicare eligibility begins at age 65. Can you get coverage if you retire at, say, 62? Definitely, just not Medicare (unless you qualify based on other criteria). That means you’ll have to secure benefits from another source.
Your pre-Medicare health insurance options may include continuing group coverage through COBRA or enrolling in an individual or short-term health insurance plan. The decision you make will likely depend on factors such as premium cost, how early you plan on retiring, and your healthcare needs.
Group + Individual Health Plans, a Quick Comparison
If you’ve been enrolled in an employer-sponsored plan (i.e., a group plan), then buying health insurance on your own could be an entirely new experience.
You may notice some similarities between group and individual health insurance plans. For instance, group major medical and individual major medical policies will include similar benefits as required by the Affordable Care Act (ACA). However, group and individual coverage also differ in some significant ways.
Group health insurance
- Choose a plan from a selection your company offers
- Enrollment is subject to your company’s annual open enrollment period or a qualifying event
- Your employer pays a portion of your premium; your portion gets deducted from your pay
- You may have access to COBRA continuation coverage if you meet eligibility requirements
Individual health insurance
- Choose from all individual plan options available where you live; these may include major medical plans that meet Affordable Care Act requirements as well as alternative coverage such as short term health plans
- Enrollment for major medical plans occurs during the annual ACA open enrollment period (for most states, Nov. 1 through Dec. 15); enrollment for non-ACA options such as short-term medical takes place year-round
- You pay your entire monthly premium unless you qualify for a premium tax credit and enroll in an ACA plan through a state or federal exchange
- You may be eligible for additional ACA subsidies in the form of cost-sharing reductions if you buy a silver plan from a state or federal exchange and qualify based on income
Understanding these differences will help you know what to expect as you begin to weigh your early retirement health insurance options.
Continuing Group Benefits Through COBRA
As mentioned above, you may be able to maintain coverage through your employer’s health insurance plan via COBRA, the Consolidated Omnibus Budget Reconciliation Act. COBRA requires certain employers to offer continuation coverage to employees when they would otherwise lose it due to a qualifying life event such as getting laid off, quitting, retiring, or reducing work hours. These benefits are also extended to an employee’s spouse and dependents.
The three basic requirements for COBRA eligibility are as follows:
- Your group health plan must be covered by COBRA
- You must experience a qualifying life event
- You must be a qualified beneficiary for that event
If you qualify for COBRA, you will have a limited amount of time in which to elect it following your qualifying event—early retirement, in this case. Time limits vary by plan, which means you will need to ask how long you have to decide once you’ve given your employer notice of a qualifying event.
How long you can remain on COBRA depends on your qualifying event. Eighteen months is the maximum related to termination (for reasons other than gross misconduct). Depending on when you begin retirement, this may or may not be long enough.
COBRA has its advantages. For starters, it is coverage you already have, which means you retain access to the same benefits and healthcare providers. However, the cost may be significant. When you elect COBRA, you could become responsible for your entire premium (i.e., the portion your employer previously paid and the portion you’ve been paying) plus an additional 2% for administrative costs. As you prepare to live on your retirement budget and consider this option, you will want to determine what exactly what the full price tag for COBRA will be in your case.
Healthcare + Insurance Costs in Early Retirement
More than 80% of Americans report that they don’t know how much money they will need for retirement. Some experts recommend saving $1 million. Others recommend using the Rule of 25, a method in which you determine how much you need to save by multiplying how much money you expect to need each year in retirement by 25. Those are just two of many approaches to setting a retirement savings goal.
How much you will personally need depends on numerous factors (e.g., lifestyle, healthcare needs, travel plans, cost of living). The bottom line? No matter your target number, retirement can be expensive.
And, a large portion of your retirement savings will go toward out-of-pocket medical expenses and health insurance costs, regardless of whether or not you retire pre-Medicare. The average couple will need $285,000 to cover healthcare and medical costs in retirement, according to a 2019 estimate from Fidelity Investments. That figure assumes you enter retirement at age 65 and do so in the year 2019.
If you plan on retiring early, in 2019 or any other year, you will probably want to accrue additional savings for healthcare expenses. Your calculations should include the following:
- Health insurance premiums before Medicare (e.g., COBRA, major medical, short-term health insurance)
- Healthcare premiums you are likely to have in retirement: Medicare Part B, Medigap or Medicare Advantage (aka Medicare Part C), Medicare Part D, long-term care insurance.
- Out-of-pocket medical expenses (e.g., plan deductible, coinsurance and copayment amounts, items and services not covered by your benefits)
It’s not possible to anticipate all of your future healthcare needs, which means you’re just giving it your best guess. An online healthcare cost projection tool can help you better estimate your needs. However, to come up with the most accurate picture, you may want to work with a professional financial planner.
A Budget-Friendly Option: Bridge to Medicare
Because your healthcare expenses could be hundreds of thousands of dollars in retirement, you’re probably looking for ways to keep them as low as possible—especially if you plan to retire early. Choosing the most affordable health insurance can be a start.
As you consider pre-Medicare coverage, keep in mind that COBRA and ACA plans are not your only options. You may also want to consider short term medical insurance with benefits designed specifically for pre-Medicare retirees. Pivot Health’s Bridge to MedicareTM Plan is one such solution, and it can be especially budget-friendly. Premiums can be hundreds of dollars less than COBRA or an ACA plan because coverage is targeted toward your needs—you’re not paying for things you don’t need, maternity benefits, for instance.
This type of plan includes:
- Multiple short-term health insurance policies (for up to three years) with benefits that help pay for unexpected medical expenses due to illness and injury.
- Non-insurance discounts for things like prescriptions, telemedicine, vision exams and eyeglasses, hearing, and emergency helicopter services.
Additionally, an open network means you can continue to use your preferred healthcare providers without network restrictions. Whereas, if you are considering individual major medical insurance on or away from an ACA exchange, you will need to check the plan’s provider networks to see if your doctors and hospitals are covered in-network. Continuing your group benefits through COBRA will also mean you have to use providers associated with your plan’s network.
So who might consider a short-term plan before starting Medicare? If you’re in good health without ongoing medical expenses, want an alternative to COBRA or an ACA plan, and are 62 to 64 years old, then a Bridge to Medicare plan could be a good fit. You will need to apply to see if you are eligible (short-term plans are not guaranteed issue like COBRA or ACA plans). Because there is no open enrollment period for this type of coverage, you can apply and enroll any time of year. Best yet, once you apply you can keep the insurance for up to three years with no re-apply medical questions.
Additional Pre-Medicare Healthcare Options
Of course, you aren’t necessarily limited to the three options mentioned above. Some individuals can be added to their spouse’s job-based health insurance plan. Others look for a part-time job that offers benefits. In rare circumstances, an employer might even offer continued group retiree coverage.
Regardless of how you decide to cover the gap between your job-based benefits and Medicare, as you approach early retirement, experts also recommend saving extra cash (i.e., money not tied up in a 401K) to have on hand for medical emergencies. (Experts typically recommend keeping three to six months of living expenses in an emergency fund.)
Yes, there’s a lot to consider if you’re planning to retire early, and pre-Medicare benefits are just one part of the picture. A financial planner can help you come up with a personal retirement savings strategy based on your retirement goals, how much you’ve already saved, and your potential expenses. To discuss your health insurance coverage options, including short term medical plans designed especially for early retirees, you’ll want to consult a health insurance professional.