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Nearing age 65? What you need to know about Medicare

Key Points
  • If you don't sign up for Medicare when first eligible and don't have qualifying coverage elsewhere, you'll pay life-long penalties for enrolling late.
  • Some people are automatically enrolled and others need to take action on their own.
  • Medicare doesn't cover everything, which means preparing for those gaps in coverage.

If you're getting close to celebrating your 65th birthday, it's time to review how Medicare will fit into your life.

Whether you're still working or not, it's best to make sure you understand the rules for signing up instead of making assumptions that could cost you down the road.

"If you don't enroll and don't have [qualifying] coverage from an employer, you could end up getting late-enrollment penalties that stick with you for the rest of your life," said Danielle Roberts, co-founder of insurance firm Boomer Benefits in Fort Worth, Texas.

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Each day, about 10,000 baby boomers in the U.S. turn 65. Fidelity Investments estimates that the average couple will spend a whopping $280,000 on health care from that age on.

This makes figuring out your Medicare coverage a key part of managing your expenses. Here's what you need to know to get you started.

The cost

Some people assume Medicare is free, Roberts said. Far from it, actually. And, there's no out-of-pocket maximum.

As long as you have at least a 10-year work history, you pay no premiums for Medicare Part A, which covers hospital stays, skilled nursing, hospice and some home health services. However, it has a deductible of $1,364 per benefit period, along with some caps on benefits.

Part B — which covers outpatient care and medical supplies — has a standard monthly premium of $135.50 this year, although higher earners pay more (see chart below). It also comes with a $185 deductible (for 2019). After it's met, you typically pay 20 percent of covered services.

Cost of Medicare Part B premiums

Medicare Part B premium costs 2019

Individual tax filers* Married file taxes jointly* Married file taxes separately* What you pay monthly in 2019
$85,000 or less$170,000 or less$85,000 or less$135.50
Above $85,000 up to $107,000Above $170,000 up to $214,000Not applicable$189.60
Above $107,000 up to $133,500Above $214,000 up to $267,000Not applicable$270.90
Above $133,500 up to $160,000Above $267,000 up to $320,000Not applicable$352.20
Above $160,000 and less than $500,000Above $320,000 and less than $750,000Above $85,000 and less than $415,000$433.40
$500,000 or above$750,000 and above$415,000 and above$460.50

Source: Centers for Medicare and Medicaid Services. *Part B premiums are based on modified adjusted gross income from two years earlier. So for 2019 it's based on your 2017 tax return.

Those parts of Medicare don't cover prescriptions. That's where a Part D drug plan comes in.

You can get a standalone plan to use alongside original Medicare. Or, you can sign up for an Advantage Plan (Part C), which typically includes prescription drug coverage. If you go this route, your Parts A and B benefits also will be delivered via the insurance company offering the plan.

The average cost for Part D coverage in 2019 is $32.50, according to the Centers for Medicare and Medicaid Services, although high earners pay extra for their premiums (see chart below). The deductible for 2019 is $415.

Medicare Part D premiums 2019

If you fail to sign up for Medicare when you first qualify for coverage and you change your mind later, you could face life-lasting penalties, which would make your monthly premiums higher.

Some people with low incomes qualify for programs that reduce their Medicare-related costs. There's extra help for prescription drug coverage, and some state-run savings programs help with copays, coinsurance, deductibles and premiums.

Signing up

If you tapped your Social Security benefits before age 65, you'll automatically be signed up for original Medicare (unless you live in Puerto Rico).

"About a month or two before you turn 65, you'll be automatically enrolled, and your card will just show up in the mail," Roberts said.

In this situation, you'll see your Social Security check reduced by the cost of the Part B premium.

Roberts said that if you already are getting Social Security benefits and you want to delay Medicare because you have qualifying coverage through your employer (see next section), call the Social Security Administration and tell them not to enroll you.

If you haven't yet tapped Social Security, the burden is on you to sign up. In that case, you get a seven-month enrollment period that starts three months before your birthday month and ends three months after that.

If you're still working

The rules for enrolling are different if you (or your spouse) are actively working and you get health insurance from your employer.

If your company has 20 or more employees, you can delay signing up for Medicare without facing late-enrollment penalties. Generally speaking, the employer will alert the program that you have qualifying coverage. Once you stop working, you get up to eight months to sign up.

Or, you can go ahead and enroll in Parts A and/or B. Be aware, though, that in this case your employer health care would be your primary coverage and Medicare would only pick up the tab if the primary policy doesn't cover a service but Medicare does. This means that if you sign up for Part B, you'll be paying a monthly premium whether the coverage is used or not.

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Roberts said many people who continue to get primary coverage through their employer sign up for Part A (because it's free) and delay getting Part B.

Meanwhile, if your company has fewer than 20 employees, you likely would need to sign up because in that situation, Medicare would be your primary insurance. The policy through your employer would only pay if Medicare doesn't cover the service and it does.

"In this situation, the insurance company knows that when you're 65, Medicare is your primary insurance and they are secondary," Roberts said. "They often aren't going to pay the portion that Medicare would normally pay."

Penalties if you don't enroll

If you fail to sign up for Part B when you're supposed to, you'll face a 10 percent penalty for each year that you should have been enrolled. The amount gets tacked on to your monthly premium.

While Part D prescription coverage is optional, the penalty for not enrolling when you were first eligible is 1 percent for every month that you could have been signed up — unless you have qualifying coverage through your employer's plan.

"We advise people even if they don't take medicine right now, at least sign up for the cheapest drug plan just so you don't face a penalty," Roberts said. "And if something bad happens, you're making sure you aren't caught with no coverage."

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Coverage gaps in Medicare

Be sure to think about how you'll pay for the things Medicare doesn't cover. For instance, it generally doesn't cover dental work and routine vision or hearing care. Same goes for long-term care, cosmetic procedures and — for the jet-setters — medical care overseas.

Many people decide to pair original Medicare with a supplemental policy — called Medigap — to help cover out-of-pocket costs such as deductibles and coinsurance. You cannot, however, pair a Medigap policy with an Advantage Plan.

If you end up choosing an Advantage Plan, there's a good chance limited coverage for dental and vision will be included.

For long-term care coverage, some people consider purchasing insurance specifically designed to cover those expenses.

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