Although current retirees can count on Medicare to pay for a large fraction of their health-care expenses, some may wish to obtain additional insurance coverage that will reduce or eliminate the risk of having to pay substantial co-payments from their own funds. As Parts 1 and 2 of this article discussed, Medicare supplemental insurance, also known as Medigap, can help seniors achieve this risk reduction. As with any insurance product, however, there are costs for obtaining coverage. The second part of this article looks at those costs in greater detail.
Premiums for Medigap policies
Unfortunately, determining prices for Medigap insurance policies isn't always easy. Unlike Medicare, which has benefit levels, deductibles, and co-payments that are uniform across the country, Medigap insurance availability and premiums can vary greatly from state to state. As a result, it's impossible to generalize for all situations a particular group of seniors might face.
One study performed by TheStreet.com gives you a good idea of the challenges involved in coming up with general recommendations for Medigap policies. For instance, while the average premium for Plan C, one of the most popular plans, is about $1,850, the actual premiums charged by insurance companies range from about a third of that amount to nearly six times the average cost. Similar disparities exist for other plan selections. Part of the reason for the differences in premiums is that insurance companies in different states charge varying amounts for similar coverage. However, even within a given state, you may find that some insurance companies charge much more for a given plan than their competitors. Shopping for the best policy is crucial.
For the most part, however, the study confirms what one would expect to see. Among the higher-cost Plans A through J, the more benefits the plan includes, the higher the premium. The lower-cost Plans K and L, which don't offer full coverage for medical care co-payments but which place a cap on total annual expenses, generally cost less than their more comprehensive counterparts.
Choosing a Medigap plan
The first decision to make about Medigap coverage is whether you want it at all. While annual premiums ranging from $800 to $2,000 may seem expensive, bear in mind that your potential costs under standard Medicare are theoretically unlimited. If you incur a large amount of medical expenses in a given year, your 20% share may be uncomfortably high.
Once you decide that Medigap coverage makes sense for you, the next step is determining which benefits you'd like included in your coverage. Many sources report that their most popular Medigap plan is Plan F, which is a more comprehensive plan covering deductibles for both Parts A and B, skilled nursing care co-payments, Medicare excess charges, and medical emergency costs while traveling abroad. If, on the other hand, you don't foresee a great likelihood of needing those types of services, a less comprehensive plan with fewer benefits can save you hundreds of dollars each year in premiums.
Part of the reason why so many seniors choose comprehensive plans may be that once you choose a particular plan, it's sometimes difficult or impossible to switch to another plan, especially one that offers more benefits than your current plan. Even if your health is good at the moment, you can't simply choose a basic plan now with the intent of moving to a more comprehensive plan later in your retirement if your health deteriorates.
Regardless of what decision you make, you should be aware that the best time to get Medigap coverage is during your open enrollment period, which extends for six months after you turn 65 and are enrolled in Medicare Part B. Waiting may endanger your rights to coverage regardless of medical history.
Locking in premiums
Another factor to consider is how your insurance company will change the premiums you must pay over time. Some companies calculate premiums based on the overall claims experience of all of their customers. These community-rated premiums include seniors of all ages, so your premiums won't automatically rise as you get older, although they may rise if the costs of the community as a whole increase over time. In contrast, other companies use attained-age-rated premiums, in which seniors can expect regular premium increases as they get older.
There is a third way of calculating premiums in which the insurance company agrees to keep your rates constant regardless of how old you are. Known as issue-age-rated premiums, this method gives seniors comfort in knowing that their rates will stay constant. From the insurance company's perspective, they also give seniors an incentive not to switch to another company, because they will potentially lose the benefit of fixed premiums for the remainder of their lives.
Medicare supplemental insurance is an important part of the financial plans of many seniors. By understanding and evaluating your Medigap options, you can manage the financial risk of medical expenses, giving you the confidence that your health needs will be met.
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Fool contributor Dan Caplinger can only wish he had coverage as good as Medigap policies provide. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy is a lifelong commitment to you.