I found an excellent article about obtaining health insurance in early retirement on Yahoo Finance this week. It reminded me that I wanted to go into a little more detail about what I learned when I started seriously preparing for early retirement. Health insurance is one of the most concerning areas for early retirees who will not have a group policy available to them.
I’ve written before about what I do for my own health insurance. But before I settled on a plan, I did a lot of reading and research and that was quite an eye opener. I knew I would be paying more for a less comprehensive health plan than I had from my employer, and I was OK with that. I did not know how difficult and outrageously expensive it can be for some people to obtain an individual policy. I also did not realize that often times when you are quoted a premium on some of the websites like eHealthInsurance, those rates apply to only the healthiest individuals. After you submit your detailed application and are approved, your premium may be higher than what was originally quoted on the site. After I submitted my application, for example, I received an acknowledgement and also was told that many applicants pay about 30% more than the “best case” premium. I was very fortunate; I obtained the lowest rate. Apparently, though, not all applicants are so fortunate.
Here are some of the important things I learned as I researched individual health insurance.
1. Location Matters. Plans and premiums vary enormously from state to state. I will talk more about why this is another time, but in short, some states “pool” all applicants regardless of health history, requiring that the insurance companies offer insurance to everyone. The result of this, while beneficial to someone with a complicated health history, is that those in good health end up paying more. And it turns into a vicious cycle - some healthy individuals, balking at the cost of policy, either go without or leave the state. Which makes the “pool” a more concentrated group of unhealthy individuals, driving rates up further.
This means that if you are thinking of moving out-of-state, you’d better do your homework ahead of time and determine what rates will be for you in the new state.
2. Exclusions are more Common than I Thought. I had heard vague discussions about exclusions for pre-existing conditions, but didn’t realize how hard it can hit someone obtaining an individual policy. In a group policy, such as an employer may offer, this tends to be less of an issue. But when you apply for your own policy, the insurance companies ask for a fairly exhaustive health history and pinpoint areas of potential expense to them. Again, I believe this may vary from state to state, but companies may identify and exclude certain health problems for a specified period of time (or permanently). I had always assumed that this would apply to major health issues such as heart disease, diabetes, or cancer, and was shocked when it was applied to me as well. When I submitted my application, I was careful to list every doctor’s visit for any reason in the requested time period. One small issue I had dealt with a couple of years prior was tendonitis in my thumb. Imagine my surprise when I learned that my policy, if I accepted, would exclude tendonitis of the hand and fingers for about a year. This was not really a big deal to me but drove home the point that the insurance company may exclude a wide variety of conditions, and obviously some of these could have a major impact on your finances.
3. Be Thorough and Precise on your Application. I felt almost paranoid as I filled my application in, fearful that I would forget some minor medical issue that had cropped up in the past few years. Why was I so worried? Because I’ve read stories about insurance companies refusing to pay claims (and dropping the policy) for an individual that may have left something off their initial application. These stories may be rare, but it does underscore the importance of providing a detailed health history when asked.
4. Premiums Online May not be what You Get. As I mentioned above, your premium may be higher than the rate first shown on a website. This is why it is important to really research the facts before you retire.
5. Your State might have a High Risk Pool. I also learned that some states in the US have a high-risk pool policy, a sort of policy of last resort. If you cannot obtain coverage through an individual insurance carrier, you may be able to obtain a policy (typically a high-deductible policy) through your state. Although I did not fall into this category, I was curious and researched availability in my state. I found there is a high-risk plan available, only to individuals who cannot be covered elsewhere, and that the premiums were not as high as I expected. Again, this will vary considerably from state to state.
6. HIPAA gives you specific rights. It is a good idea to familiarize yourself with HIPAA and the rights it gives you.
7. COBRA may be an option for 18 Months. For those who are leaving an employer’s group policy, you may have COBRA rights that will enable you to continue your policy at your own expense for 18 months. Since I knew I would need insurance for much longer than 18 months, I didn’t bother with this, but it could be helpful if you only need coverage for a short period of time, or if you need it as a “bridge” until you obtain another policy.
In summary, what I would advise anyone thinking about early retirement would be to start researching cost and availability of individual health insurance long before your expected retirement date. In fact, I would go one step further and say that you should probably actually apply for the policy you are interested in, to determine whether you will be approved, what exclusions might be applied to your policy, and what your premium and deductibles would be. I applied for insurance about 4 months before I left my employer’s plan, and had overlapping policies for about a month. Although I hated to waste the money on the unnecessary premium I paid for that month, it was the best I could do to time the policy so that I had assurance of a plan in place before I absolutely had to have it.
And a final word - I have no expertise in the area of health insurance, only my own experience and the research I have done. I strongly discourage you from making any decisions based on my experience alone. Rather, I encourage you to thoroughly research your own options for health insurance well before you need it.
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Tags: planning
September 24th, 2008 at 3:01 pm
These are some great nuggets about health insurance in early retirement. You statement about being paranoid about missing a pre-existing condition on the initial applications reminds me of when I was applying for disability insurance. I was very meticulous to get all details correct.
September 24th, 2008 at 5:48 pm
Thanks for the article, this’s definitely food for thought. One things that keeps popping up in my mind is how easy is it for a policy to get “dropped”?
Let’s say I pay for a few years, then break a leg. While I understand that the insurance may cover a portion of the cast/crutches/dr apptmnt/etc, how easy would it be for the company to drop my policy afterward….or to drop it as I get older, and thereby more prone to sickness?
Thanks for the info. This is something I’ll be pondering in the coming weeks.
September 24th, 2008 at 11:19 pm
This is a great post–I had the same issues when looking for my own health insurance and it was really hard to find information about the “rules.”
I would also add the advice that it’s really important NOT TO LET COVERAGE LAPSE. You should always take COBRA when you leave a job while you are shopping for a new plan. Under HIPAA you are guaranteed coverage at the end of your COBRA period as long as you did not let coverage lapse. Insurers can legally reject you if you are without coverage. You are only guaranteed continuation of coverage under HIPAA if you have coverage to begin with.
Also, under HIPAA, as long as you have coverage (and pay your premium on time and do not move to a different state, and did not fill out your application fraudulently), you are guaranteed renewability (although not at the same premium!)
You can always get your state’s high-risk pool insurance as a last resort, but in my state the cap on annual coverage is terrible. If you actually got a serious disease, you would be way under-covered.
September 25th, 2008 at 11:09 am
@Roshawn - Thanks for your comment; it’s good to hear that I’m not the only one so concerned about accuracy on the application form. I went over it numerous times, trying to make sure it was 100% accurate and complete!
September 25th, 2008 at 11:15 am
@Wesley - As Syd points out in her comment, you cannot be dropped just due to claims. However, I have read that one way insurance companies try to get around this is that they can drop an entire plan. So, for example, if there is a plan against which there have been numerous large claims, that plan can be dropped and anyone who was insured by that plan would have to re-apply for a different plan. Then there is no guarantee that you would be accepted to a different plan.
You also have to start all over if you move to a different state.
I’m sure there is still much I don’t know, but what I have learned leaves me really dismayed with the private health insurance market.
September 25th, 2008 at 11:19 am
@Retired Syd - Thanks for your comment and the additional information. It is really overwhelming all we need to know to be a smart consumer in the health insurance industry.
You are absolutely right about not letting coverage lapse. I chose to overlap my individual policy with my employer’s policy, but if I had not been able to do that I would have taken COBRA benefits until my new plan started up.
As for the high-risk pool, I’m not certain that every state offers one. The link I included in the article seems to indicate that 29 of the states have one; I’m not sure what the other states do.
September 25th, 2008 at 6:59 pm
There was an article on Money magazine for Oct about health insurance for early retirement as well. One thing that stood out for me from that magazine was that a lot of retired people take part time jobs at Starbucks or Home Depot in order to get onto their health insurance policy. Apparently there are more than a few companies that will let you get on their group policy if you work hours to qualify.
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September 25th, 2008 at 8:13 pm
@asithi - That could be a good alternative for early retirees who really need to join a group policy. I’d sure hate to have to take a part-time job just for the health insurance, but it’s good to have options!