Retirement Strategies When Medicare Isn't Enough
In its latest survey of retiree health-care costs, Fidelity Investments estimated that a 65-year-old couple retiring this year would need about $240,000 to cover medical expenses during their retirement, up 4 percent from 2011. The rising costs — and the fear of being left bankrupt by medical bills — are why more retirees are opting for a supplemental insurance plan to foot what Medicare doesn’t cover.
“Most seniors need some type of health-care insurance in addition to Medicare,” says Amanda Starc, assistant professor of health care management at the University of Pennsylvania's Wharton School.
One such plan is Medicare Supplemental Insurance, known also as Medigap, which is sold by private insurance companies and is secondary to the primary insurance Medicare. Usually, Medicare pays 80 percent for hospital care and doctor visits, for instance. Medigap, or another supplemental plan, steps in to cover remaining costs.
Medigap, like Medicare, is available to Americans aged 65 or older, who are entitled to Social Security or railroad retirement benefits and younger individuals, who qualify early for Security Disability Insurance benefits due to a certain medical conditions or disabilities. Medicare also covers individuals of any age with end-stage renal disease, which requires dialysis or a kidney transplant, although Medigap does not.
Medigap, while popular, is only one option for older Americans who need additional health insurance coverage. For retirees with a relatively comprehensive employer-sponsored plan, they may not need to buy extra coverage.
For others, the increasingly in-demand Medicare Advantage may do the trick. This plan is an HMO with zero to modest monthly premiums, on average $35, and a typical out-of-pocket expense of $300 to $400 annually, Starc says. The plan's major downside is that it only covers medical costs where you live. So if you travel or have a second home in another state, your out-of-pocket medical expenses could be high.
Nonetheless, many Americans are signing up for the HMO option. As of March, some 13 million Americans have opted for Medicare Advantage, up 1 million from 2011, according to the Kaiser Family Foundation. That HMO participation represents 27 percent of all Medicare beneficiaries. In 2010, 20 percent of Medicare recipients chose a Medigap policy, according to Kaiser’s latest figures.
To evaluate whether Medigap is right for your and/or your family, consider the following:
Premiums. Medigap providers are allowed to set their premiums and pricing models by state. However, the benefits and coverage are the same nationwide. So the key is to pay the lowest premiums offered in your area. According to examples on Medicare.gov, monthly premiums for these policies can range from $120 to $177. “Invest in being a good consumer and get as much information as you can before buying a plan,” says Starc.
Types of pricing. Medigap insurance companies categorize policies differently and that could affect the premiums you pay, according the Medicare.gov. They are:
1. Community-rated or no-age-rated, which means the same monthly premium is charged to everyone, regardless of age, and it doesn’t rise as you age.
2. Another category is issue-age-rated, which meansthe premium is based on the age when you buy the policy and charges younger buyers lower premiums that don’t rise as they get older.
3. The most expensive category is attained-age-rated, which is based on your current age, and the premium rises as you get older. Premiums may also rise due to inflation and other factors.
Agents. One of the worst places to buy a Medigap plan is from the insurance agent, who handles your home or auto insurance, says Bryce Williams, chief executive of Extend Health, which sells Medigap insurance. Those general-purpose agents typically don’t understand how Medigap insurance works. Another bad idea, he adds, is to select a policy without shopping around and comparing prices among competitors.