Should You Get a Medigap Plan?

One decision people need to make when they reach age 65 is whether to enroll in a Medicare Supplemental Insurance -- aka, a Medigap plan -- to help cover the healthcare costs that Medicare doesn't. Here's what you need to know about how much you can expect Medicare to cover, and the various Medigap options available.

How much will healthcare cost you after age 65?

Once you reach 65, you'll probably be covered by Medicare Parts A and B, which are hospital and medical insurance, respectively, and are collectively referred to as "original Medicare." Medicare Part A is free for most people, but you'll pay a premium for your Part B coverage; it's currently $109 per month for the majority of Medicare beneficiaries. In addition, there are several expenses you can expect to pay for out-of-pocket, such as dental care, eyeglasses, and of course, your copays.

Image Source: Getty Images.

According to Medicare.gov, here's what the average Medicare beneficiary with just Parts A and B can expect to pay out-of-pocket for their healthcare in 2017:

Source: www.Medicare.gov.

However, it's important to recognize that these costs can vary significantly from person to person. For example, if you have congestive heart failure, you can expect nearly $4,000 added to your annual out-of-pocket expenses. In a Kaiser Family Foundation study, it was determined that the average Medicare beneficiary in poor health had about 2.5 times the out-of-pocket expenses of people in excellent health. Since it's impossible to know when your health might go from good to not-so-good, it's reasonable to assume that your actual out-of-pocket healthcare expenses in retirement will be unpredictable if you have only original Medicare.

What do Medigap plans cover, and how much do they cost?

Medigap plans are standardized, and must be clearly identified as "Medicare Supplement Insurance." In most states (Massachusetts, Minnesota, and Wisconsin are the exceptions), Medigap policies are identified by one of 10 letters.

Each of these 10 plan types provides a different package of benefits. Some cover copays and coinsurance, and some cover Medicare's deductibles, either in full or in part. For example, Medigap Plan A is required to be offered by any insurance company that sells Medigap policies, and pays for things like Medicare Part A and B coinsurance and copayments in full, but does not cover the Part A and B deductibles. You can compare what each plan covers on Medicare's website.

Medigap Plan F is the most comprehensive and covers virtually every copay and deductible you could face. While it's the most expensive plan, it's also the most popular by far, chosen by two-thirds of seniors who decide to buy a Medigap plan. It seems seniors are willing to pay for the peace of mind of not having to worry about healthcare costs.

Availability of Medigap plans varies by location and insurance company. As I mentioned, all insurance companies that offer Medigap plans must offer plan A. In addition, they must offer either plan C or F. Beyond that, the exact assortment of plans offered by each insurer can vary significantly. Costs also vary significantly, depending on your location and the plan you choose. For example, the most popular and comprehensive Medigap plan, plan F, has a national average monthly premium range from $159 to $239 per month for a 65-year-old male.

You can compare your options by using Medicare.gov's plan finder. If you have two addresses, such as a summer and winter home, it's a smart idea to compare the costs at both.

Should you get a Medigap plan?

Whether or not you should get a Medigap plan depends on how much risk you're willing to take with your healthcare costs in retirement. Medicare parts A and B cover a great deal, but don't cover everything. And, there is no out-of-pocket maximum. A serious illness could potentially cost you a tremendous amount of money if original Medicare is the only insurance you have.

While it is an additional expense to worry about, a Medigap plan can help you define your healthcare expenses more precisely, and set an upper limit on your medical costs in retirement.