Every Health Insurance Option Before Medicare Ranked (Worst To Best)

Every early retirement health insurance video does the same thing. It lists your options, ACA, COBRA, healthcare sharing ministries, part-time work, short-term catastrophic private insurance. Here they are, good luck. But nobody actually ranks them. And more importantly, nobody explains how they're actually ranking them. Today, I'm ranking every health insurance option before Medicare based on one thing, how much control you actually have over the outcome. Some of these options come down to eligibility. Either you qualify or you don't, and there's no strategy involved. But one option is almost entirely shaped by decisions you can make yourself. Specifically, how you manage your income on paper. And that's the difference between someone paying $175 a month and someone paying $1500 a month, even with the exact same health and the exact same savings. After more than 25 years of helping people plan for the years before Medicare, I'll walk you through where each option lands and why. If you want help figuring out where you land, there's a link in the description to book a call with my team. When you retire before Medicare kicks in at age 65 and you don't have have an employer-sponsored retiree health insurance option available to you. There are a handful of options that are commonly available depending on your income. Some of the common possibilities include COBRA, health care sharing ministries, short-term catastrophic private insurance, and Affordable Care Act insurance, which also is known as ACA insurance. And depending on the state you reside in, you may have a state-sponsored version of ACA insurance. Before Before we discuss the different health insurance options, it's important to understand how modified adjusted gross income works. This is important because the cost of certain types of health insurance in retirement can be heavily influenced by modified adjusted gross income. To understand modified adjusted gross income, it is important to understand how different types of investments are taxed. So imagine for a second you had to take all of your different retirement investments and you had to place them in one of three buckets. The first bucket we're going to call the tax deferred bucket, which would include things like IRAs and 401ks. plans. And from a tax perspective, these work very similarly. When you put money into these different types of investments, your money goes in on a pre-tax or a tax deductible basis, which means you save money in the year you put money into this bucket. And while your money is growing in this bucket, your money grows on a tax deferred basis, which means you're not paying taxes on capital gains or interest income or dividends. However, when you retire and take money out of this bucket for qualified reasons, you have to pay tax. generally on 100% of what you withdraw in the year you withdraw it. And when you contrast that to the tax-free bucket, which would include things like Roth IRAs and Roth 401k plans, with the tax-free bucket, you don't get a tax break when you put money into this bucket, generally speaking. But your money grows tax-free, and if you take it out for qualified reasons in retirement, it comes out completely income tax-free as well. The final bucket is what we call the taxable bucket. Sometimes you'll hear people call this the non-qualified bucket And when you put money into this bucket, you generally don't get a tax break up front. And as you earn interest and dividends and capital gains in this bucket, you have to pay taxes on those earnings in the year you earned them. However, the money that you invest into any investments within the non-qualified or taxable bucket, generally that's called your basis. And you can take your basis out later. And since you've already paid tax on that money, you can take that out. without it counting towards anything associated with modified adjusted gross income or taxable income. So now that you understand the three different buckets, let's talk a little bit about modified adjusted gross income. What is included in modified adjusted gross income would include things like wages, salary, pay that you might be getting, social security income, pension income is included, distributions from that. tax-deferred bucket including IRA distributions. If you have any small business money that you're getting and it's net business income, that counts towards modified adjusted gross income. And interestingly, municipal bonds that are generally income tax-free when you earn money on them are included towards modified adjusted gross income when we're doing planning for ACA insurance which will come into play later. Also, any income, dividends, and capital gains that you make in taxable bucket that we referred to in the previous scenario, all of that money is also included. But even more important than what is included is what is excluded. Qualified distributions from Roth IRAs, none of that money counts towards modified adjusted gross income. And any basis that you take out of the non-qualified bucket or that taxable bucket that we mentioned earlier, none of of that counts towards modified adjusted gross income either. It is important to know that for For ACA insurance, they don't look at your assets. They only look at your modified adjusted gross income. And we have many clients who are millionaires that pay very little for health insurance because they have organized the income in buckets to show very little in modified adjusted gross income in the years where it truly matters. And we'll be getting into that more later. Unfortunately, many people don't put their investments in the proper buckets during their working years and end up paying large sums of money. For example, in my hometown, a married couple who are both 62 years old with $84,600 of modified adjusted gross income only pay around $8,426 per year for ACA insurance. But if they go $1 over that, they pay $40,265. So literally close to $32,000 more for $1 over $84,600 of modified adjusted gross income. This is called the cliff. And we want to do anything we can. can to prevent people from going over the cliff. So now that we've gone over how modified adjusted gross income is structured, let's delve into some of the different options for retiree health insurance. For starters, let's go over COBRA insurance. COBRA insurance typically costs between $400 to $700 per month for an individual and can exceed $1,500 to $2,200 per month for a family coverage. Your specific costs will vary based on a variety of factors, including your location, plan you choose, and a handful of other variables. COBRA coverage typically lasts for up to 18 months if you quit your job. So for many people looking at retirement, this is only a temporary solution. Some of the advantages of COBRA insurance include you typically get to keep your current doctors and specialists and the hospital networks that you like to work with. Your current drug coverage also stays active. The money you already paid toward your annual deductible even carries over. Additionally, your coverage continues without new waiting periods. periods or exclusions. Finally, your coverage begins right after your job-based insurance ends with no gap. Next, let's go over the disadvantages with COBRA insurance. The first disadvantage is cost. You pay 100% of the total health premium instead of just your employee share, plus a 2% administrative fee. As I mentioned earlier, monthly costs can range from $400 to $700 per month for an individual and can exceed $1,500 to $2,200 per month for family coverage. Another disadvantage includes the lack of subsidies. COBRA plans do not qualify for government or income-based subsidies like Affordable Care Act plans do. Additionally, coverage is short-term and usually ends after 18 months, although some Some events allow for up to 36 months of coverage. The final disadvantage is you cannot change your benefits or switch to a cheaper tier within the same plan. Now, if you're looking at this list and realizing your income might already be pushing you toward a worse option than you need to be in, that's exactly the kind of thing my team and I help people fix. There's a link in the description where you can book a call with us. We'll look at your specific numbers and show you what it would take to move up this list. A second option for retiree health insurance that I see people electing to. is something called healthcare sharing ministries. Technically, this is not actually health insurance. Healthcare sharing ministries are non-profit organizations where members with shared religious or ethical beliefs voluntarily contribute a monthly fee to help pay for each other's medical bills. The advantages with this type of coverage include monthly costs are often lower than traditional insurance, members can join at any time of the year, and they foster a community with shared values. The disadvantage with this coverage includes that this is not insurance, and for that reason, healthcare sharing ministries lack state and federal consumer protections. Due to this fact, ministries can deny claims if they do not fit their guidelines, leaving members legally responsible for unpaid medical bills. Additionally, since these are not regulated as traditional insurance, insolvencies could occur. For example, in 2021, one of the largest healthcare sharing ministries named Charity with a lot of unpaid member claims. So if I were to summarize one way to think about healthcare sharing ministries versus traditional health insurance options, I would say they have a high risk, high reward trade-off. Short-term catastrophic private insurance, I would rank third when ACA and COBRA insurance are not an option. Finally, coming in fourth place would be healthcare sharing ministries due to the high-risk, high-reward nature of those plans that we mentioned earlier. So your takeaway from this should be that if you are considering going on ACA insurance in the future, I can't emphasize enough How important it is to develop a plan for where your income is coming from, from the time you retire until the time Medicare kicks in at age 65. We find many people, even those with millions of dollars in investments, can stay below the cliff with proper planning, which ultimately can save them significant amounts of money on their health insurance costs. In summary, if I were to rank these in order, I would rank ACA and COBRA insurance 1 and And two, depending on your modified adjusted gross income, Due to the comprehensive coverage they both have, if you can keep your modified adjusted gross income below the cliff, I would typically recommend ACA insurance or a state-sponsored version of ACA insurance. If you can't, COBRA insurance can be a good temporary solution. So that's every health insurance option before Medicare ranked from worst to best. Some of them you either qualify for or you don't, but for most retirees, the real answer comes down to one option that's actually in your control and how well you manage it. And here's the thing, health insurance is usually the number one reason people delay retiring early, but once you understand it's actually solvable, it stops being the obstacle. I've helped hundreds of people retire before 62, and I break down exactly what works in this video right here. I'll see you there.