As retirement approaches, understanding the nuances of health insurance options becomes increasingly important. One such option that retirees often consider is COBRA, a federal law that allows individuals to continue their employer-sponsored health insurance after leaving their job. While COBRA can provide a crucial safety net, especially for those not yet eligible for Medicare, it comes with its own set of rules and considerations that retirees must be aware of. This continuation coverage can be a lifeline, but it is essential to understand the costs involved, as retirees are typically responsible for the full premium, which can be significantly higher than what they paid while employed.

You can also work with a financial advisor to plan your finances and retirement budget to help you pay for COBRA or to help find an alternative option.

What Is COBRA?

COBRA, or the Consolidated Omnibus Budget Reconciliation Act, is a federal law that provides employees and their families the option to continue their employer-sponsored health insurance coverage after experiencing a qualifying event that would typically result in the loss of coverage. This law is particularly beneficial for individuals who have lost their jobs, experienced a reduction in work hours, or undergone other life changes such as divorce or the death of a covered spouse. By allowing individuals to maintain their existing health insurance plan, COBRA offers a crucial safety net during transitional periods.

If you’re receiving health insurance with the help of COBRA, that means you’re remaining on your employer’s, or soon-to-be ex-employer’s, health insurance plan. To be eligible for COBRA coverage, individuals must have been enrolled in their employer’s health plan when the qualifying event occurred. Employers with 20 or more employees are generally required to offer COBRA coverage, and it applies to private-sector companies as well as state and local government employers.

This may be an appealing option for some retirees who aren’t yet eligible for Medicare. A retired employee can get up to 18 months of health insurance coverage with COBRA.

How COBRA Works for Retirees

COBRA works for retirees in the same way it does for any employee. Whether an employee is terminated or quits voluntarily or retires, the employee will likely be required by the employer to pay the full cost of their health insurance coverage, plus a 2% administrative charge. Because employers usually pay for part or most of the employees’ coverage, an employee may be astonished when they learn how much they have to spend for their health insurance.

You could say that COBRA is aptly named because this is an expensive way to pay for health insurance and your finances and budget may feel squeezed. But for a retiree who has less than 18 months before being eligible for Medicare, it may be a reasonable option to ensure that they have health insurance. It also might work as a temporary stop-gap to keep health insurance coverage going while looking for cheaper alternatives.

There is another scenario in which you might want to use COBRA. If you are retiring and you are entitled to Medicare, but you have family members who will not be covered by your health plans, such as a spouse or son or daughter, they will be allowed to continue on your employer’s group health plan for up to 36 months. You, meanwhile, would use Medicare. You aren’t allowed to use Medicare and your employer’s health insurance simultaneously.

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Alternatives to COBRA for Retirees

According to the Kaiser Family Foundation (KFF), in 2023, annual premiums for employer-sponsored family health coverage were $23,968, with employees paying on average $6,575. If your health insurance premiums were to quadruple, you may feel that COBRA is cost-prohibitive. For many retirees, not to mention any employee leaving a job without health insurance, COBRA will be the last resort and not the first option. Instead, if you are retiring and are not eligible for Medicare, you may want to try:

Have your spouse add you to their plan: You can join a spouse’s employer’s health insurance if that’s feasible.
Purchasing a plan on a marketplace: Created by the 2010 Affordable Care Act, is available at HealthCare.gov, the marketplace can help you find the right plan. You don’t have to purchase a health insurance plan on your own; you may want to work with an insurance broker. If there is an affordable healthcare plan, an insurance broker would be able to steer you to it.
Purchase a plan directly: You will probably find less expensive prices with the insurance marketplace, however. But that’s why insurance brokers can be helpful to work with. They can guide and advise you as you try to determine how much you can afford to pay for healthcare.
Look into health-sharing plans: These are health plans offered by organizations, in which you “share” medical costs. Your monthly payment could be less than $500 a month, but this is generally only used as catastrophic healthcare coverage, and only if you’re in good health. It is an option, but probably not a realistic one for most retirees.
You might be able to get Medicaid: If your income is low enough. In general, you’ll need to possess $2,000 or less in cash assets.

Because COBRA can be so pricey, you also may want to consider holding off on retiring until you are eligible for Medicare. If your current job isn’t feasible, perhaps until you can get Medicare, you could find a part-time job that offers a healthcare plan. Retiring early can be doable, but you might have to think outside the box for health coverage.

Tips for Planning for Health Insurance in Retirement

Planning for health insurance in retirement is a crucial step to ensure financial stability and peace of mind during your golden years. As healthcare costs continue to rise, having a well-thought-out plan can help you manage expenses and maintain access to necessary medical services. Here are some essential tips to consider when planning for health insurance in retirement.

Understand Medicare Options: Familiarize yourself with the different parts of Medicare, including Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage), and Part D (prescription drug coverage). Knowing what each part covers and the associated costs will help you make informed decisions about your healthcare needs.
Consider Supplemental Insurance: Medicare doesn’t cover everything, so you might want to explore supplemental insurance options like Medigap. These plans can help cover out-of-pocket expenses such as copayments, coinsurance, and deductibles, providing additional financial protection.
Evaluate Long-Term Care Insurance: Long-term care insurance can be a valuable addition to your retirement plan, as it covers services not typically included in standard health insurance, such as nursing home care and in-home assistance. Assess your potential need for long-term care and consider purchasing a policy while you’re still relatively young and healthy.
Budget for Healthcare Costs: Estimate your future healthcare expenses, including premiums, out-of-pocket costs, and potential long-term care needs. Creating a realistic budget will help you allocate funds appropriately and avoid financial strain during retirement.
Stay Informed About Policy Changes: Healthcare policies and regulations can change, impacting your coverage and costs. Stay updated on any changes to Medicare and other health insurance programs to ensure your plan remains effective and aligned with your needs.

Planning for health insurance in retirement requires careful consideration of various factors, including Medicare options, supplemental insurance, and long-term care needs. By understanding these elements and staying informed about policy changes, you can create a comprehensive plan that supports your health and financial well-being throughout retirement.

Bottom Line

Understanding COBRA rules for retirees is essential for those transitioning from the workforce to retirement. COBRA, or the Consolidated Omnibus Budget Reconciliation Act, provides retirees with the option to continue their employer-sponsored health insurance for a limited period after leaving their job. This can be a crucial bridge for those not yet eligible for Medicare or who need time to explore other health insurance options.

Tips for Retirement Planning

Healthcare during retirement is one of many things you need to have a plan for. Getting your finances in order by investing in the right assets now is the best way to help you afford the right insurance and lifestyle later. A financial advisor can help you do just that by creating a plan that meets your needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
As you’re planning out what health care is going to cost you as a retiree, it’s also a good time to make sure you have the right budget plan in place so that you can afford your chosen lifestyle. You can use SmartAsset’s free budget calculator to help you do just that.