Health Insurance Options in Early Retirement

Health insurance is one of the biggest puzzles of early retirement—right up there with "what day is it again?"

Six months into early retirement, I wish I could say health insurance isn't on my mind. But it is—a lot. It’s hard not to with health care costs being so high in the U.S. compared to other countries.

It is a lot easier when you receive health insurance through your employer. They do all the legwork—they find the best plan and negotiate the best rates. All you have to do is pay your tiny portion of the monthly premiums. And even that is automatically taken out of your paycheck. You don’t really notice any of this happening. But you know you have health insurance.

In retirement, it’s all on you to procure health insurance for yourself and manage payments. If you’re too young for Medicare, you really have three options.

OPTION 1: COBRA

Your first option for health insurance in early retirement is COBRA insurance. COBRA allows you to keep the same health insurance plan you had with your employer for a limited time.

If your employer offers COBRA coverage, they’ll send you paperwork in the mail within 45 days. You then have 60 days from the date your employer-sponsored health insurance coverage ended to enroll in COBRA.

You will also be able to make changes to your insurance elections at this time since loss of employment is a qualifying life event. For example, if you want to switch from an HMO plan to a PPO plan or perhaps drop your vision coverage, this would be your chance to do so. Otherwise, you’ll have to wait until the open enrollment in November to make any changes.

There are several pros and cons to COBRA coverage.

PROS

1. You’re probably already familiar with the coverage you’ll have. Unless you make changes to your elections, everything stays the same. It’s the same insurance cards, doctors, copays, deductibles, etc.

2. If your spouse and dependents were covered under your employer-sponsored plan, they’ll continue to be covered.

CONS

1. The biggest drawback of COBRA is that you’ll be responsible for paying 100% of the insurance premiums. As an employee, you pay only a fraction of the premiums. Employers typically cover approximately 70% to 80% of premium costs. So, expect to pay a lot more than what you’re used to if you choose COBRA. Additionally, you’ll probably also be paying a 2% administrative fee. If you hated your employer before you left, you’ll probably hate them a lot less once you see how much they were subsidizing you.

2. COBRA coverage is only temporary. It gives you coverage for up to 18 months. So, if your employer-sponsored health insurance ended on December 31, 2024, COBRA can cover you until June 30, 2026. After that, you’ll need to find a new health insurance plan.

COMMON COBRA QUESTIONS (AND HEADACHES)

Q: How much would I pay for COBRA?

A: Ask your Human Resources department for an accurate number. For a ballpark figure, look at the medical deductions line on your recent paystub to see the amounts that you and your employer paid toward your coverage. Add those two amounts and add a 2% administrative fee for a subtotal. If you’re paid monthly, that subtotal is roughly what you’d pay for COBRA each month. If you’re paid biweekly, multiply that subtotal by 2.17 for your estimate.

Q: Is COBRA more expensive than buying insurance on my own?

A: Not necessarily. It all depends on the insurance premiums your employer contracted for. Two companies can have completely different premiums.

Q: I wasn’t covered by my employer’s health plan before I left the company. Am I still eligible for COBRA coverage?

A: No. To be eligible for COBRA, you must have been covered by the employer’s health plan before you separated from the company. The same goes for any dependents. They must have been covered by your employer-sponsored plan before you left the company to be eligible for coverage under your COBRA plan.

Q: If I wait to enroll in COBRA until day 60, the last day to enroll, does that extend coverage by 60 days as well?

A: No, delaying enrollment doesn’t change when COBRA coverage ends. COBRA covers you up to 18 months after your employer-sponsored coverage ended, not when you enrolled. Additionally, if you wait to enroll, you may end up owing back payments for any premiums you missed.

Q: What if I need to go to the doctor before COBRA kicks in?

A: Perhaps it took a while to receive your COBRA paperwork. Or maybe you waited to enroll. Whatever the case, if you need to see a doctor before COBRA coverage starts, you're covered. COBRA is retroactive to the day your previous coverage ended. Just be prepared to pay the full cost out-of-pocket and request reimbursement later.

Q: Can I enroll in COBRA for now and later switch to a plan I find through the Marketplace?

A: Yes and no. The only times you can enroll in any health insurance plan are during the open enrollment period at the end of the year or after a qualifying life event.

If you keep COBRA for the full 18-month term, when coverage ends, that is considered a qualifying life event. This triggers a special enrollment period, giving you 60 days to enroll in a new health plan.

Voluntarily ending COBRA coverage early is not considered a qualifying life event. So, if you decide to end your COBRA coverage in the middle of the year, you’ll need to wait until the open enrollment to purchase a new plan. And then your new coverage won’t begin until January 1 of the following year at the earliest. You could, however, end COBRA on December 31 and have new coverage on January 1, provided you signed up for a new plan during open enrollment.

Q: Can I make changes to my COBRA coverage during open enrollment?

A: Yes, you can. You’ll receive notice during the open enrollment period. At that time, you can switch to a different plan and add or drop family members.

OPTION 2: HEALTH INSURANCE THROUGH THE MARKETPLACE

Your second option is the Affordable Care Act (ACA) Marketplace—basically the government's version of online shopping, but for health insurance instead of sneakers.

WHAT YOU NEED TO KNOW ABOUT THE MARKETPLACE

• After you separate from your employer, you have 60 days to enroll in a Marketplace plan. If you miss this window, you’ll need to wait until the open enrollment period.

• Each state has its own Marketplace. Start at healthcare.gov to be directed to your state’s Marketplace.

• The insurance plans available—PPO, HMO, EPO, POS, or HDHDP—differ by state.

• There are four tiers of coverage: Bronze, Silver, Gold, and Platinum. The percentage of health care costs that insurance covers differs between the plans. Bronze plans have the lowest premiums, but have higher copays, deductibles, coinsurance, and out-of-pocket maximums. In other words, you’ll be paying more if you see the doctor. On the flip side, Platinum plans have the highest premiums, but have lower copays, deductibles, coinsurance, and out-of-pocket maximums.

• Don't just look at the premiums when choosing a plan. The copays, deductibles, coinsurance, and out-of-pocket maximums of Marketplace insurance plans may be much higher than what you're used to.

GOVERNMENT SUBSIDIES TO OFFSET COSTS

Health insurance through the ACA Marketplace isn’t necessarily lower than COBRA or private insurance. So, it’s a good idea to compare other options before enrolling.

That said, you may qualify for government subsidies to offset some of the premiums, depending on your income. How much you receive is based on your expected Modified Adjusted Gross Income (MAGI) for the year you want coverage.

Unfortunately, your MAGI isn’t listed on your tax return or paycheck. You’ll need to calculate that number.

If you overestimate your MAGI, you could end up owing money to the government when you file your annual taxes. If you underestimate it, you may receive a refund when you file your taxes.

OPTION 3: PRIVATE HEALTH INSURANCE

If neither COBRA nor the Marketplace works for you, there's always the old-fashioned route: private health insurance.

Unlike Marketplace insurance plans, these are not qualified health plans that meet ACA requirements. However, similar to Marketplace insurance plans, private health insurance plans are major medical plans. This means that they include the essential health benefits required by law:

• Chronic disease management, preventive care, and wellness services

• Outpatient care

• Emergency services

• Hospitalization

• Laboratory services

• Prescription drugs

• Mental health and substance use disorder services

• Rehabilitative and habilitation services and devices

• Maternity and newborn care

• Pediatric services

Private health insurance plans are not eligible for government subsidies. But they can still be relatively affordable when compared with full-priced Marketplace insurance plans. Deductibles may also be lower with private health insurance plans. They're definitely worth checking out.

HELP CHOOSING THE BEST HEALTH INSURANCE OPTION IN EARLY RETIREMENT

Having to choose between all the Marketplace and private insurance plans can feel overwhelming. Luckily, there are insurance agents and brokers who can make recommendations for your specific needs.

Enter your zip code on this page for a list of agents and brokers in your area: www.healthcare.gov/find-local-help/

HOW WE ARE MANAGING OUR HEALTH INSURANCE

For reference, here’s how my wife and I are currently managing our coverage.

Prior to either of us retiring, we each researched the cost of COBRA coverage through our respective employers. My wife had really good—and really expensive—insurance through her company. COBRA through her company would be approximately $1,000 just for her. Meanwhile, COBRA coverage for both my wife AND me through my company was a little over $700.

Financially, it made sense to get COBRA through my employer. So my wife retired first. Since loss of employment is a qualifying life event, it allowed me to add her to my insurance plan as a dependent. This, in turn, allowed me to add her to my COBRA plan later.

Before I retired, we also researched plans on the ACA Marketplace. We estimated our MAGI to be too high to qualify for any tax subsidies. This means we would have to pay the full monthly premium—around $1,500 for the two of us.

Next, we checked out private insurance. It was a few hundred dollars less, but still more than COBRA.

So, when I retired, we chose COBRA because it was our lowest-cost option. We plan to keep COBRA until it expires in the fall of next year. Once it does, we'll enroll in a new plan—most likely private insurance—and then reevaluate during open enrollment. It's not exactly the fun part of early retirement, but it's one of those details you can't afford to ignore.

Navigating health insurance in early retirement feels a bit like trying to read a foreign language. But after enough hours on healthcare.gov—and pestering a few former HR colleagues—I think I’ve earned an honorary degree in Surviving the System.

Too bad it doesn't come with better coverage.

Here’s hoping next year’s enrollment is a little easier—and affordable.

If this post was of any help to you, let me know in the comments below.

See you at the finish line!

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Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.