Insuring an Early Retirement

If you're fortunate enough to retire early, you'll need to find a good health care plan.
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One of the most envied financial positions to be in is having the ability to retire early. You've worked hard, done well and want to reward yourself with exotic travel or feel big by beating all the older retirees on the golf course.

But before you dive headfirst into that early retirement, there is something else you must plan for -- health insurance coverage.

The majority of us retain health insurance coverage through our employers for most of our lives and then access Medicare benefits at the age of 65, or continue with employer retirement benefits.

But what if you plan to retire before the age of 65? If your job doesn't offer retirement coverage, you will find yourself in a bit of a bind. After decades of having an employer make the decisions for you regarding health insurance, you can find yourself on your own.

There is the option of continuing coverage with the employer plan through COBRA. However, this is only available for a limited time -- up to 18 months -- and can be rather expensive since you would have to pay the full premium. And you want your hard-earned savings to go toward your retirement, not health-care premiums.

You can also see if you can convert your group plan to an individual health policy. But you should do your own research on purchasing an individual health insurance plan, which could be cheaper than either of the first two options.

If you have had at least 18 months of creditable group coverage without significant breaks before applying for individual health insurance, the Health Insurance Portability & Accountability Act (HIPAA) forbids health plans from denying coverage or imposing pre-existing condition exclusions.

Unlike group coverage, however, the premium you are charged will be based on your current health status and age and will likely go up as you get older.

But be aware: Private individual insurance is paid for with after-tax dollars, unlike the policy you had through your employer, which was paid with pretax money.

The Bush administration has proposed leveling the playing field by giving everyone who purchases coverage the same deduction, whether the policy is through a job or outside the workplace.

You will also want to check out traditional health insurance plans as well as some of the newer models, such as Health Savings Account (HSA)-eligible plans. These plans allow you to make tax-deductible contributions into a HSA (similar to an IRA) to be used at your discretion on qualified medical expenses when coupled with a high-deductible health insurance plan.

At age 65, if you have not used the money for medical costs then you can choose to withdraw the money for nonqualified expenses at normal tax rates.

Prices on individual plans will vary considerably depending on your age, state and coverage/deductible selection. According to eHealthInsurance, a 55-year-old male in Tallahassee, Fla. could expect to pay $383.91 on a HSA-eligible plan with a $1,500 deductible, whereas a 60-year-old in Dallas would expect to pay anywhere from $624 to $1,091 on a $500 deductible plan.

If you plan to move before you turn 65, Robert Hurley, vice president of eHealth, recommends asking the insurer if your plan is portable. A few insurers will allow you to retain coverage but will charge you a new rate based on the local area. This is important because if you have to cancel your policy and re-apply for a new policy you will be subject to a medical history review again.

Hurley also offers an intriguing possibility for early retirees: purchasing an individual policy and dropping your employer plan a few years

before

you retire. This way you can lock into a policy while you are still young and most likely healthier (premium rates will still increase as you age).

You don't want to find yourself facing retirement without an affordable plan. However, since you still remain eligible for the group plan HIPAA allows insurers to deny coverage or include exclusions. If you are in good health, however, this should not be problem.

Fortunately, early retirees who seek out an individual policy will find that more insurers are catering to this market. BlueCross BlueShield of Florida, for example, has courted the individual market with a range of plan structures.

It opened up the Florida Blue store this past February, a retail store where customers can walk in for advice and insurance products. The idea is to encourage people to be more engaged in the purchase of insurance, ask questions about coverage and learn about the tools and information that the insurer can assist them with -- bringing the consumer into "consumer-driven" health care. There is hope!

Donna O'Rourke joined Weiss Ratings, now TheStreet.com Ratings, Inc., in 1999, and is the senior analyst responsible for assigning financial safety ratings to health insurers and supporting other health care-related consumer products including Medicare supplement insurance, long-term care insurance and elder care information. She conducts industry analysis in these areas. She has more than 10 years experience in credit risk management and analyses. Previously she served as an assistant vice president at the Union Bank of Switzerland, where she analyzed hedge funds, insurance companies and structured products in support of the derivatives and foreign exchange businesses. She holds a bachelor of science in management from Binghamton University and a master's of science in health systems administration from the Rochester Institute of Technology.

While O'Rourke cannot provide investment advice or recommendations, she appreciates your feedback;

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