Should You Take COBRA When You Retire Early?

What are we talking about today? >> So, today we're going to talk about our good friend Cobra. >> Mhm. >> And why it should not be the default for honestly a lot of early retirees. >> Okay, so you're talking just in the case of someone retiring before 65, leaving the work plan. Why should Cobra not be the default? >> Absolutely. >> Okay. Why do you think it shouldn't be? I never really kick it to you. >> Now you don't, but you do a pretty good job of uh >> I will. >> You're you'll butt in. >> I'll I'll tell you where you're wrong. >> So, as we know, Cobra lasts up to 18 months. It's the same plan you get through your job, and essentially you just have the chance to continue on on that plan. And it costs full price. The employer's not kicking in anything. But, it only lasts up to 18 months. And so, for people who essentially have more than 18 months until they reach their 65th birthday, can't take them all the way there. And so, if you're going to have to make a change, you might as well make it right now. >> That's pretty good. >> That's what I got. >> It's over. Count it. >> We're done? >> Yeah. >> Yeah? >> Did it. >> That's amazing. You know, I used to think Cobra stood for a continuation of benefits or >> [laughter] [snorts] >> But, if you actually look into it, it's called the Consolidated Omnibus Reconciliation Act. >> Jamie, what does omnibus mean? Can you pull that up? >> Oh, you're going to Jamie. >> [laughter] >> So, the scenario you've laid out is exactly the reason why. And let's pretend you're 60. You retire. You've got 5 years until you hit 65 when you go on Medicare, get a good supplement, get a Part D, dental, vision if you care about it, you're home free, you're done. But what about those 5 years between 60 and 65? Like you said, you'll be offered Cobra. And Cobra is a continuation of those benefits. Your employer no longer chips in their portion. So, you're paying not only what you used to pay out of your paycheck, but you're also going to pay what the employer was paying cuz they're not going to pay for it cuz you're not working there anymore. >> Employers pay a lot, too. >> And employers typically pay Well, they have to pay at least 50%. So, you can at least double what you're currently paying. But sometimes it's tripling, quadrupling, and then if you have a spouse, it can get into the stratosphere. >> Found out that Butler pays 80%. >> For spouses? >> For everyone. >> Oh, get on that thing, man. >> I know. >> Oh, that's great. He's getting married in gosh, just a few days now. >> few days. >> One days countdown. >> time of the recording, just a few days. >> Just a few days. And his wife's got a great plan through Butler University. Yeah. Definitely get on that thing. Okay, soon-to-be wife. >> Soon-to-be. >> Okay. Um So, yeah, employers are typically chipping in a bunch. And in the case of this, I mean, even 80% for the spouse. So, when you come off that, you could be looking at a 4x of what you're used to paying. And to Aaron's point, it'll only last 18 months anyway. So, if I'm 60, it'll get me to 61 and 1/2. Great. >> [snorts] >> But I still got 3 and 1/2 years to go. Not to mention whatever my spouse has if I have a spouse and if they're also on the plan. And so why we are talking about potentially changing right at 60 instead of just taking Cobra and then changing is really comes down to one thing because when when your Cobra expires just as when your work plan ends that is something called a qualifying life event when you lose major medical coverage. So you leave the job or you get laid off whatever. And when Cobra expires those are both qualifying life events. A qualifying life event opens up something called a special enrollment period where you have 60 6 0 days to hop on to another health insurance plan. Now typically we don't want to use up all of the 60 days cuz you want continuous coverage. So typically when the insurance ends your other insurance starts. So what are the options when Cobra isn't available? When your work plan is no longer available. There's two high-level options. There's going to be the Affordable Care Act and then there's going to be something called basically non-marketplace plans. And it's this collection of private individual health insurance plans that have a lot of pros. They've got a couple of cons. But for healthy people who make good money they're a much better option than the Affordable Care Act. The reason I bring all of this up is because if you are 60 and you are reasonably healthy you need to bridge the gap 5 years to Medicare. Taking Cobra and then going on to one of these private non-marketplace plans that has no network restrictions, cheaper than the marketplace, better deductibles than the marketplace you could get ill during that 18 months. So we're presupposing when you retire at 60 >> Yeah. >> that you're in good health. You're in decent health. And you're not going to go back to work. You don't have access to any other sort of job. So, you're going to need a plan for those 5 years to get you to 65 to get you to Medicare. What I'm saying is you should be taking out that private plan. That doesn't have any network restrictions that has a better deductible and a better premium than the marketplace. Right when you leave your job. >> Right. >> Forego Cobra. Take the non-marketplace plan right away because it is something called guaranteed renewable. Which means it lasts as long as you want it to last. So, if you want it to last all the way to Medicare those 5 years, it will and it can and it never asks you to go back through underwriting. Because what you're doing if you're reasonably healthy at 60 by taking out that non-marketplace plan is you're locking in your good health for the remainder of the time you need to purchase health insurance until you get to 65 until you get on Medicare. If you instead took out Cobra for those 18 months to get you to 61 and 1/2 and you go, "Yeah, I get the private plan. We'll get to that when I turn 61 and 1/2. I want to stay on Cobra because it's comfortable. My doctors already know it. It's a great plan. I want to use up that 18 months." I understand the mentality of that, but what if you get sick during those 18 months? >> Yeah. >> What if you start taking an expensive medication? What if you develop cancer? What if you get heart disease? What if you develop diabetes? At the expiration of your Cobra at 61 and 1/2, you are not guaranteed issue one of these private non-marketplace plans. You will be relegated to the marketplace. Because those are the only individual plans out there that will cover pre-existing conditions right away day one no waiting periods no surcharges. The private plans can discriminate against pre-existing conditions. >> Yeah. >> So, if you develop something during during those 18 months, it's going to be covered really well cuz you're on your Cobra plan. It's a great plan. But then when it expires, the private plans are going to look at you and go, "Eh, you're uninsurable." >> Right. >> "Eh, we're going to put a waiting period on that." The marketplace will open you with you know, they'll welcome you with open arms. They'll gladly take you on. So, what's the downside there? Well, a lot of people who are working, they hear negative things about the marketplace. They kind of hear like, "Oh, yeah, Obamacare kind of sucks, but I feel like not enough of them know why." They think it's just because the plans are expensive, which they are. And they think it's just cuz the deductibles are high, which they are. But the real downside to the marketplace not enough people know about, not enough people talk about, it's the network. So, the network is where can I take this plan? Which doctors can I go see? Which healthcare providers will allow me to use my insurance there? On your Cobra, on your work plan, what you've been used to for decades, is a PPO network. PPO stands for preferred provider organization. What that means is there's an organization of providers they prefer you go to. They're going to give you lower copays, better coinsurance, lower deductible, lower max out of pocket. It's great if you're in network. But the best part about the PPO is it will also cover you if you're outside the network. You're just going to have a higher out of pocket. But you're still covered. So, you are covered no matter where you go on that PPO. Now, transition to a marketplace plan, an Affordable Care Act. All of those plans, outside of maybe 2% of plans nationwide, all of them are going to be some sort of narrow network plan, an HMO, an EPO, and they had the audacity to call one a POS. >> [snorts] >> Stands for point of service, but it may as well stand for the other thing. All of these plans have limited to no, and I repeat no, benefits outside of the network. If you have an HMO or an EPO, you have no coverage outside your network. >> None. >> You are only covered inside your network. And we're talking about state-based marketplace plans, that often means your coverage will be limited to the geographic state that you're in, and even limited within that state as well. The cheapest plan here in Indiana, Indianapolis, is an Anthem Blue Cross Blue Shield Pathway X ACA plan. It's the cheapest one, and a lot of people think, "Anthem, I know Anthem. I know Blue Cross Blue Shield. That's a good company. Maybe that's even what they had at their job." But when you pivot to that one, it has an exclusive provider network of only IU Health facilities, meaning Indiana University Health. In Indiana, there are five major hospital systems. It's telling you you can go to one of them. And there are no IU Health facilities outside of the state. >> Yeah. >> So, how restrictive is that? You may be on some Anthem Blue Cross Blue Shield PPO through your employer, and you go, "Well, I'll just get an Anthem Blue Cross Blue Shield plan on the marketplace. Everything's fine." Little did you know, it's the Pathway X HMO ACA plan that doctors look at and turn sideways and point you out the door cuz they don't accept it. So, that's what you're potentially risking. Whereas at 60, if you're even just of reasonable health, and you go to one of these private non-marketplace plans that have no network restrictions that you can keep all the way to 65, that are cheaper than the cheapest ACA plans, that you can lock in. But you potentially are forgoing the optionality of opting into one of these non-marketplace plans if you take out Cobra for that 18 months and you get sick. >> Yeah. >> So, often times people will say, "Well, Cobra's the safe option. I've budgeted for this. I can can it. It's the safe option because it's the known quantity. All my doctors take it. It's a great plan. I'm not arguing that it's not a great plan. I know it's a great plan. But it actually isn't the safest option. It's the safest option for 18 months. It's not the safest option for 5 years, which is what you actually need in that scenario. The safest option there, if you qualify for it medically, is the private plan. >> Yeah. And one of the things we run into is people, you know, that are retiring early, they can afford Cobra. It's a you know, not a slam dunk. It's going to cost a lot of money, but they can afford it. And they're probably looking at ACA prices thinking, "I'm not getting a tax credit. If I'm comparing the two, why wouldn't I just go with this this Cobra plan?" But they don't know that door number three exists. And they don't know that "Hey, if I stay on Cobra, I do get sick, I will be relegated to that ACA plan, which is going to be as expensive, if not more expensive than the Cobra, when you add a supplement to expand that network." >> Yeah. So, the other factor that we didn't really talk about, which you were kind of dancing around, is going to be your income. Because the other alternative to when you turn 60, if we're looking at a private plan, the private plan just costs what it costs. There's no tax credits available. They don't even ask you how much money you make. So, make $0 or a million dollars, doesn't matter. Price is what the price is. The situation where I would say, "Actually, we're not going to recommend a private plan, even if you're healthy, and we're not going to recommend Cobra, >> [snorts] >> is if your modified adjusted gross income for your household upon retirement will qualify you for a tax credit. If you're in that boat, these Affordable care act tax credits are so large for people in their like late 50s and 60s, they're enormous. So, if you can show as a couple $60,000 in income upon retirement, you know, maybe you delay your 401k distributions, you don't draw social security, you don't have a pension, maybe you're living off savings, whatever it is. If you can show a somewhat modest income in retirement, you're going to get all this money to get an ACA plan. And now I can hear what you're saying. You're like, "Matt, you told me the ACA plan suck. Why would I want an ACA plan?" I hear you. But, the ACA plan is a major medical. It's going to cover you somewhere. So, even that Anthem plan, I probably wouldn't recommend the Anthem plan, but a little step up. In Indiana, there's this plan called Ambetter and it's accepted at all five of the major hospitals. It's still an HMO. Still restricts your care to being in network, but now you at least have some flexibility in the state of Indiana. But, what if you travel? What if you know, "Hey, if I got a brain tumor, I want to go to the Mayo Clinic." What if you still want that provider freedom? Okay. If your income qualifies you for a tax credit at 60, I'm going to say let's go get you that Ambetter plan. That's your major medical. That's heavily subsidized. Maybe it's 300 a month for both you and your spouse. Maybe 400, maybe 500. Now, let's add a supplement to it that will now cover you for a catastrophic event due to disease, hospitalization, surgery, emergency, injury, accident, any of that stuff. It'll now cover you anywhere in the country. That's what the supplement does. It now fills in the gaps of that plan. And maybe the supplement costs 600, 700 a month. Now, you add the 3 4 500 to the 6 or 700 a month. Now, we're at 1,000 to 1,200 a month. >> Yeah. >> Now, we're looking pretty good cuz Cobra was two grand a month. >> Yeah, it is. >> Full priced private plan was 1,700 a month. Let's utilize the tax credit that we qualify for. Let's wrap that no network restricted supplement around it. Now that is a configuration you can keep all 5 years to 65. >> Yeah. >> So there is some optionality there. I'm not saying completely throw out the ACA. I like the ACA. Half our clients are on the ACA. Some of our clients that's all they can qualify for medically. So obviously we're going to use it. >> Yeah. >> But you have to address the elephant in the room about the ACA which is the narrow network restrictions of it. Because your retirement strategy, your financial planner might just be looking at what's the premium and what's the max out of pocket. And those are two very important factors in your health insurance. But one very often overlooked factor is yeah, but where can I use this? Where's it actually covering me? Financial planners may optimize for premium and max out of pocket, but they put you on an HMO. And you spend 4 months out of the year in Florida. And you visit your kids out in Colorado. And you maybe only at home where your state marketplace plan is 6 months out of the year. Well, then you're only really covered 6 months out of the year. >> Yeah. >> Why not add that supplement, protect your finances, protect your every your retirement plan, what this financial planner worked so hard to build up for you and you did too. Let's protect it all the way to 65. Then we cancel all that stuff. Then we just get you on Medicare and a supplement. Things get so simple and so inexpensive and so great. >> Yeah. >> It's just about getting you there. >> Yeah. And so we're talking all about this one side where don't take Cobra. Let's say that 60-year-old, when would they take Cobra? >> There's one real situation where I'm going to actually recommend Cobra. At the end of the day, take Cobra if you want to take Cobra. >> Sure. >> the trade-offs, if you understand the risks, who am I to tell you what to do? I can just give you advice. And I can tell you about the potential downsides. If at the end of the day, I've got a couple of 6-year-olds who are peak health and they're like, Matt, we're really just more comfortable taking Cobra for 18 months. All right, do it. Reach out to me in 16 months so we can put something together prior to your Cobra expiring. And if they're super healthy healthy at 60, there's a good chance they'll be super healthy at 61 and a half. >> Yeah. >> It's just the potential that they're not will then relegate their decision and it'll pigeonhole it to the ACA. And if they value network freedom and provider freedom and cost certainty, maybe forego the Cobra. But to your question, who should take the Cobra? There's one situation that really stands out in my mind where I'm absolutely going to recommend Cobra and then a second situation just popped into my head. >> Okay. >> If you are relatively healthy person and you would otherwise qualify for a private plan medically, but maybe you just have something coming up. >> Mhm. >> Maybe you're a healthy guy, you're active in the gym, but you need a knee scope. Maybe you're a healthy guy, but you used to pitch in college and you you put off this rotator cuff surgery forever and ever and you're like, ah, I should probably just get this done before retirement. I want to just go take Cobra for a couple months, go get that done, rehab, come back. Now that the shoulder's done, now that the knee's scoped, now hop on the private plan. >> Yeah. >> Cuz the private plan's going to have a waiting period on stuff you already know you need done. >> Right. >> That's the drawback to the private plan. 12-month wait if you already know you need something done. So if you're an otherwise healthy person that's got some sort of procedure, operation, therapy, sleep study, I don't know, pick a thing. If it's already on the books, take out Cobra until it's done, till it's wrapped up, then hop on the private plan. Cuz you can disenroll from Cobra whenever you want. You don't have to take it the full 18 months. >> Yeah. >> The other more ironclad situation where I'm going to recommend Cobra every time is if you cannot pass medical underwriting for a private health insurance plan, which is totally okay. A lot of 60-year-olds out there can't, and that's okay. That's what we have Cobra and the ACA for. In that situation, if you are going to make above the tax credit threshold on the ACA. So, for a household of one, that would mean above 62,600. And for a household the size of two, that would mean above 84,600. If your income due to distributions, dividends, capital gains, rental income from a property, social security income, a certain percentage of it, pension, whatever. If you can't get below that tax credit threshold in retirement, and you cannot pass a medical underwriting, obviously, in my opinion, please take Cobra. Take Cobra for those 18 months. Because after Cobra is up, as a person who can't pass the medical underwriting, you're going to be relegated to the ACA. Well, why would we take out the ACA when you're 60 if you're not getting a discount on it? ACA is expensive full price. >> It's close to Cobra. >> It It's more expensive than Cobra. >> Yeah. >> In in most situations, depending on what drug formularies you need or or which doctors or specialists you want to go see, it can be more expensive. So, if we know we're relegated to the ACA, and we're relegated to a full-priced ACA, if it's if it's between Cobra and full-priced ACA, Cobra every time. Because the quality of the plan is going to be so much higher. In certain instances, the premium will be cheaper. The deductible almost certainly will be better. And it's a plan you actually know and understand. So, if the alternative to Cobra is a full-priced HMO ACA plan with a higher deductible and potentially higher premium, take Cobra. Exhaust it for the 18 months. Then we'll be there to help you transition to the best marketplace plan that we can. Maybe we'll be able to in that time figure out how to show a lower income. Um but that would really be the number one situation that I would say you got to take Cobra. >> Yeah. And another thing that people don't think about is okay, let's say you know, you're 64, your spouse is 60. Retiring. You think, oh, well, if I take Cobra it's going to get me all the way to 65. I might as well put my spouse on Cobra, too. And that's where people don't realize don't do that. >> So again, if that's your comfort level, do it. >> Right. >> But if we're actually looking at this and you want me to give you advice like you were my mom, don't do that. >> Right. >> Cuz here's the situation. You're 64, your spouse is 60. >> Yeah, Cobra's going to get you to 65. That's great for you. But again, it's just kicking the can down the road for your spouse. Now they're 61 and 1/2, Cobra's expired and whoop they're in that same boat. Now it's either ACA plus a supplement or it's private plan if they can qualify. That person, since they need the full five years, we might as well switch them now keep the 64-year-old on Cobra >> Exactly. >> get them safely to Medicare. A lot of people don't realize you don't it's not an all or nothing with Cobra. If just the person who was working wants to take it the employer is tickled by that. Oh, yeah, that's great. Just the employee take it. That's fine. And then the spouse can go get something else, something they can keep for the full five years. >> Yeah. You can't go the other way around though. Make that abundantly clear. If you're the one working and getting the insurance and you're 60 and your spouse is 64 you can't just allow the spouse to keep it. >> The only caveat there >> Okay. >> is if I'm already Medicare eligible. >> Okay. >> spouse is not. When I retire to go on Medicare, my spouse will be offered Cobra. >> Okay, that makes sense. >> But in that situation, so in that situation, what I'm meaning is, let's say I'm 66, my spouse is 61. I'm already Medicare age and I'm carrying the health insurance for the two of us. When I retire, I'm just going to go on Medicare. So, I retire from the company, I'm going to go on Medicare. Cobra doesn't really apply to me cuz I'm not going to take Cobra at 66. I'm just going to take Medicare. But my spouse, if she was on the plan with me at the time of my retirement and I went to Medicare, she is allowed to take Cobra. Now, again, if she's 61, do we really want her to take Cobra? >> Probably not. >> Only if >> Right. >> [snorts] >> she couldn't pass medical underwriting and our income upon retirement is above that 84,600 threshold. In that situation, sure. She should take Cobra, exhaust it, then we optimize for a full-priced ACA plan when Cobra expires. But if she's somewhat healthy, why are we even doing Cobra? >> Right. >> Throw in the trash, Medicare, private. >> Yeah. Yeah. I mean, from what we've seen with the videos we've posted, Cobra's a very hot topic. People I mean, it's sticker shock. It's what the heck is this? It's didn't even know this was an option in some cases. >> It's the Consolidated Omnibus Reconciliation Act. >> Now people know. >> Or no, budget. Budget. I forgot the B. >> this is the B. >> Consolidated Omnibus Budget Reconciliation Act. 1985. It's a good year. It's when I was born. >> There you go. >> Yeah. I'm old. >> But yeah, Cobra, the more you know. >> The more you know. Um and a lot of people do get that sticker shock because what they're used to insurance costing is what's being deducted from their paycheck. And most people typically understand that their employer is chipping in something. And it's funny, the the first thing on every call I I say, "You know, you're going to be offered Cobra. What do you know about it?" "Oh, I don't know. It's expensive." That's what everybody says. 95% of people. Yeah, that's the first thing. "Oh, I don't know. It's expensive." And there are some people who think it's this like far off, outside of the realm plan that you like are opting into Cobra. It's It's just allowing you to continue your current plan. So, your plan benefits don't change. The price doesn't change. You just the sticker price for you changes cuz now you're paying what your employer used to pay. So, >> And if it's the middle of the year, your deductible just continues on, right? It's not a reset of any sort. >> No, it's the same plan. >> Same plan. >> Mhm. So, that's that's another situation where potentially you want to weigh that. >> Okay. >> Now, I'm not a big fan of [snorts] "Well, I already put this money towards the deductible, so I got to keep the plan." I I really don't like that cuz that's counting on having more health care. And I don't want you to have any health care. I don't want you to use any of your health insurance cuz that means you're sick or you're hurt. I don't want you sick or hurt. But in the scenario, maybe you retire in October. >> Yeah. >> And you've hit your deductible, well, maybe we take Cobra through the end of the year. And then we hop on a plan January 1st. That could be another situation where maybe that makes sense. But again, if you're multiple years away from Medicare and you're reasonably healthy, just get on the private plan. It's going to lock in your cost certainty, lock in a good network, lock in your good health. And then once you hit 65, cancel it. You're home free. >> I like it. >> [snorts] >> This has been another episode of Talking of course, is an acronym for Straight Health Insurance Talk. I am Matt Allen. >> I am Aaron Miller. >> Thanks for your time. >> 1 2 3 4

Why is COBRA so much more expensive than my paycheck deduction? COBRA keeps the same plan, but your employer stops paying its share. You now pay your old contribution, plus everything your employer covered, plus a 2% administrative fee. Since employers often pay well over half, your cost can double, triple, or more.

Will COBRA get me all the way to Medicare? Usually not. COBRA typically lasts 18 months, so someone retiring at 60 still faces about three and a half more years. If you'll need a new plan eventually, it can make sense to choose it now.

What's the risk of using COBRA first and switching later? Private, medically underwritten plans can decline you or add waiting periods if your health changes. If you develop a condition while on COBRA, the ACA may be your only option when it ends. Taking a guaranteed-renewable private plan while you're healthy locks in your eligibility until 65.

When does taking COBRA make sense? There are two main cases. First, if you're healthy but have a known procedure coming up, COBRA covers it before you switch. Second, if you can't pass medical underwriting and your income is above the ACA tax credit limit (for 2027 coverage, $63,840 for one person or $86,560 for a couple), COBRA is usually better than a full-price ACA plan.

Does my spouse have to take COBRA if I do? No, COBRA isn't all-or-nothing for a family. A 64-year-old employee can take COBRA to reach Medicare while a younger spouse moves to a plan that lasts until their own 65th birthday. If the employee is already on Medicare, a covered spouse can usually still elect COBRA.