A large number of people wait until near-retirement age to start thinking about retirement planning. That can include Medicare insurance.
While there are some benefits that are best delayed, such as Social Security, others need to be acted on early to ensure reasonable rates and desired coverage. One of those is Medigap insurance. Your clients should be asking about Medigap insurance as soon as they turn age 64. Waiting just a few months can mean the difference in dramatic rate increases and coverage reductions.
“Medigap insurance is exactly as the name implies. It fills the gap that Medicare leaves open,” said Jillian Nel, a financial planner at Legacy Asset in Houston, TX. “If you’re covered by Medicare only, there are some gaps like co-insurance and deductibles that can be significant. You can contract with a private insurance company to fill those gaps.”
Also known as Medicare Supplement, Medigap plans enable your client to cover those deductibles and co-insurance amounts, while also enabling them to keep their preferred doctor, specialist and hospital.
Still, retirement planners should advise clients that, as with any insurance policy, you get what you pay for. Your client can opt for a comprehensive plan that covers more expenses beyond Medicare, but they will pay a higher premium for the plan.
Educating your client
Many consumers are very confused about what Medigap insurance is and what it does; or perhaps they haven’t heard of it at all, advisors said.
“I have to educate people a lot about it,” Nel said. “Most people think that there is Medicare and that is it, and that’s all they need. Like Social Security, it is the base of your coverage, but there is so much more that you need to manage in terms of risk.”
Your clients may also be confused by Medigap versus Medicare Advantage plans. Both are options for people with Medicare. “Technically, only Medigap counts as Medicare supplemental insurance – in fact, that’s its formal name – but Medicare Advantage plans may provide some extra benefits that could be considered as supplementing Medicare, according to Patricia Barry in the AARP Bulletin.
Medigap is private insurance that can only be used by individuals enrolled in traditional Medicare, and helps with out-of-pocket expenses that Medicare doesn’t cover. These include Medicare Part B costs such as the 20 percent your clients would otherwise pay at physician visits, or Medicare Part A costs such as hospital care deductibles.
Medicare Advantage includes a variety of private health plans, usually HMOs or PPOs, which offer alternative coverage to Medicare. These plans cover the same benefits that Medicare does, but can include additional benefits and different payment structures.
How the plans work
The challenge for retirement planners is to understand the different Medigap plans available to clients.
Medigap policies come in 10 standardized benefit packages, said Gil Armour, a certified financial planner with SagePoint Financial in San Diego, CA. These packages are labeled as the letters A, B, C, D, F, G, K, L, M and N. The most popular, and most comprehensive, plans are C and F.
“Each state has a Medigap plan that is A-N, and each plan is somewhat the same around the country,” Nel said. “So a Medigap A in Texas would look similar to one in California. But just like there is Part A [Hospital] and Part B [Medical] of Medicare, Medigap has A-N, so people find it a bit confusing.”
Retirement planners need to examine each plan carefully to recommend which best meets a client’s needs. Your client can pay a little more to get more comprehensive coverage, or a little less, depending on what they can afford and how much coverage they desire, Armour said.
“Choose a policy based on whether you want flexibility of picking any doctors, or more restrictive HMO-style plans,” Armour said.
Which policy to recommend
Advise your client that, whichever Medigap plan they choose, prescription drugs are not included in the coverage. If your client has significant prescription expenses, they may need a Medicare Part D drug plan as well. Medigap plans also don’t cover vision care, dental care, hearing aids or long-term care. Depending on your client’s overall needs, a Medicare Advantage plan may be the better option than a Medicare policy plus Medigap policy plus Part D drug plan.
To advise your client on which Medigap policy to select, consider their current health status and family medical history. The federal government offers an online search tool (medicare.gov) to help in the process. Click on “Supplements & Other Insurance” at the top of the page, and then “How to Compare Medigap Policies.”
Clients should also understand that there are three pricing methods that affect their costs. Medigap policies are general sold as “attained age” policies, which have premiums that start low but increase as the individual gets older. “Issue-age” policies have prices that increase due to inflation rates rather than the policy holder’s age. They tend to start out a bit higher but have fewer increases over time. “Community-rate” policies charge everyone in a designated area the same premium regardless of age. Your client may ultimately save money over time with an issue-age or community-rate policy.
When your client should enroll
The best time for your client to enroll in a Medigap plan is within six months after enrolling in Medicare Part B. This is the open-enrollment period, during which your client cannot be refused a policy, or be charged more for a policy due to pre-existing health issues.
After the open enrollment period “people with more health issues are going to pay more for Medigap premiums,” said Nel. “If you don’t sign up for Medigap [in the open enrollment period], they have the opportunity to raise your premiums, to exclude pre-existing conditions, to do a whole bunch of negative stuff that people need to understand.”
Conversely, “ you can choose lower price plans that cover less stuff in the beginning when you’re more healthy, but to switch those as a later date after you’ve incurrent some health issues is going to be extremely costly.” Nel said you should advise your client to start off with as much coverage as they can afford today.
The most common mistake that consumers make with regard to Medigap insurance is waiting too long to look into it, Nel says. That makes it especially important for you to advise your client as they near retirement age on what the insurance is all about.
“The one major thing that people often leave out when they’re dealing with retirement planning on their own is an assessment of risk,” Nel said. “The unexpected is always coming. If you have not protected yourself against risk, all the planning you do for retirement is ruined. That’s the section of the conversation where I bring up Medigap. If you’re approaching 65 this is something that you have to put in place, because all the planning that we’ve done on your portfolio, the growth that we’re done, all this is going to be totally worthless.”