Investing For Your Future
Monthly IFYF Investment Message
August 2005
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In Chapter 1 of Investing For Your Future, you learned about investing pre-requisites; i.e.; things like an adequate emergency fund (3 to 6 months of living expenses), written financial goals, and a cash flow management (a.k.a., budgeting) system. Another essential financial management task is securing adequate health insurance coverage, particularly if you are self-employed or your employer does not provide it as a fringe benefit. After all, one serious illness could deplete your invested assets or, worse yet, lead to bankruptcy. A study released earlier this year estimated that 54% of bankruptcy filings were caused, in some way, by debt related to unpaid medical expenses.
This article will discuss available health insurance options for people who lack employer-provided health coverage or are provided only with a high-deductible policy. A prime concern is obtaining the best available coverage at the lowest possible cost. That way, dollars not spent on health insurance can be invested for future financial goals. Recent studies have found rising health care costs to be associated with decreasing retirement plan savings. Many health insurance programs are known best by their acronyms. Below you will be introduced to three common ones: COBRA, HIPAA, and HSAs.
COBRA is an acronym for Consolidated Omnibus Budget Reconciliation Act, a 1980s federal law that allows departing workers (e.g., victims of downsizing, retirees, voluntary job changers) to continue group health insurance at their own expense. The COBRA law affects workers in companies with 20 or more employees who are not eligible for Medicare or other health insurance. Former employees are covered by COBRA for up to 18 months after leaving a job and former spouses of workers are eligible for up to 36 months of coverage upon "qualifying events" such as widowhood or divorce.
COBRA benefits are not automatic. They must be applied for within 60 days of a worker's termination date or a dependent's qualifying event. Someone electing COBRA coverage must also make sure that health plan providers are available where they live. If you decide to move out of state, for example, and the employer provides an HMO, coverage may not be available where you live, except in emergency situations. Sometimes it may be possible to switch from a managed care health plan (e.g., HMO, PPO) to "traditional" (a.k.a., fee for service) coverage if the use of COBRA benefits and an out-of-service area move are anticipated (e.g., early retirement).
COBRA health insurance is expensive and can result in "sticker shock" to workers unaccustomed to paying for health insurance. Nevertheless, the premium charged (group insurance rate plus a 2% administrative fee) may be cheaper than an individual health insurance policy in many states. In addition, persons covered by a COBRA policy cannot be denied coverage or be subject to a waiting period for preexisting conditions. Some workers use COBRA as a "bridge," electing to retire at age 63 ½ and paying COBRA premiums for 18 months until their eligibility for Medicare.
Once COBRA benefits are exhausted, another federal law called HIPAA (Health Insurance Portability and Accountability Act) kicks in. Like COBRA, HIPAA guarantees coverage regardless of preexisting conditions and without a waiting period. Coverage is also expensive because insurance companies are required to accept all eligible applicants. HIPAA benefits must be applied for within 63 days of the end of COBRA benefits.
A third frequently-mentioned health insurance program is health savings accounts (HSAs). HSAs are like an individual retirement account (IRA) for health care expenses. Money placed in an HSA is tax deductible and designed to pay health care expenses that are not covered by a high deductible (defined as $1,000+ for single individuals and $2,000+ for families) health insurance policy. Currently, singles can contribute up to $2,600 or their insurance plan's deductible amount and, families, up to $5,150.
Following a slow start, HSA accounts are just starting to be offered in many places. Workers and/or their employers can make a contribution. Money in HSAs can build from year to year, providing an opportunity to accumulate years of savings for large medical expenses. There is no "use it or lose it" feature as found in flexible savings accounts (FSAs). If money is withdrawn for anything but medical expenses prior to age 65, taxes and a 10% penalty apply. After age 65 (Medicare eligibility), people who spend HSA funds on non-medical expenses will pay income tax only.
It is predicted that employers will increasingly offer high-deductible health insurance policies in the future as a way to contain rising health care costs. Many workers will, therefore, be considering HSAs in years to come. Investing for your future also requires adequately insuring your future against large financial risks such as a catastrophic illness or accident. For additional information about health insurance options, visit www.ihealthinsurance.net , www.nahu.org, and www.naic.org.