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Life Health > Health Insurance > Medicare Planning

3 Strategies to Keep Medicare Premiums Low

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What can advisors do for higher income clients to position them better to get the same Medicare coverage without unnecessarily high premiums?

With Medicare premiums set to take a bigger bite out of more higher-income retirees’ Social Security benefits in the next couple of years, Medicare expert Dr. Katy Votava outlined some strategies she sees as useful during a recent webinar.

“Higher incomes pay more for the Medicare B premiums, as well as pay an additional amount for the privilege of participating in Medicare D that’s above and beyond the actual premium for the insurance coverage,” Votava said.

Medicare Part B premiums are based on a person’s income – or Medicare-adjusted gross income, which is calculated using the adjusted gross income (Line 37 on the Form 1040 tax return) plus tax-exempt interest (Line 8b on Form 1040).

Part B premiums are expected to go up in 2016 for higher-income Americans thanks to lower inflation and no 2016 cost-of-living adjustment (COLA) for Social Security recipients.

In 2018, some higher-income Medicare beneficiaries may have to pay more in Part B and Part D premiums. This is due to a provision in the Medicare Access and CHIP Reauthorization Act of 2015.

This is important now because Social Security looks at the tax return two years in arrears to determine its MAGI and in effect its premiums. So, 2018 premiums will be based on 2016 tax returns.

For example, Part B premiums are expected to rise from $238 per month per person to $310 per month per person in 2018 for Medicare beneficiaries with incomes from $133,501 to $160,000 (or $267,001 to $320,000 per couple), according to a Kaiser Family Foundation analysis. And, for beneficiaries with incomes between $160,001 to $214,000 (or $320,001 to $428,000 for a couple), monthly Part B premiums are expected to rise from $310 to $381 per person in 2018.

“More people will be paying the highest premium starting on the tax return based in next year,” Votava said. “What can we do for our higher income individuals and ourselves to position ourselves better to still get the same coverage but not pay unnecessarily high premiums?”

Votava and Tom Dickson, leader of RMF Financial Advisor Channel, discussed three strategies to help minimize the cost of Medicare plans and reduce high-income consumer exposure to unforeseen Medicare premiums:

Enroll in Medicare at the right time

1. Enroll in Medicare at the right time to avoid costly, lifelong penalties.

One way to avoid unnecessary costs is by enrolling into Medicare on a timely basis to avoid penalties.

“Medicare enrollment periods are critical because you have a window of opportunity for various reasons to get into Medicare as well as to get a new plan,” Votava said.

The initial enrollment period is seven months around the 65th birthday, but there is also a special enrollment period that is eight months after a trigger event.

There are also annual general enrollment (1/1 – 3/31) and open enrollment (10/15 – 12/7) periods.

“If a person doesn’t get into Medicare in their initial enrollment period and they do not have the criteria for what’s called a special enrollment period down the road, that’s when they’re going to be having penalties and problems,” Votava said. “The annual premiums and penalties they will pay the rest of their life.”

Someone who signs up late for Medicare Part B would have to pay a late penalty premium every month for the rest of his or her life, along with the Part B premium.

The monthly Part B premium would go up 10% for each full 12-month period that the customer could have had Medicare Part B but did not take it.

The Medicare Part D penalty is the same, but 12% per year.

To avoid penalties, Votava suggests that if a client is not applying for Medicare during the initial period, she should make sure she is eligible for special enrollment later or wait for the next general enrollment period.

Report life-changing events to Social Security

2. Life-changing events can affect a client’s income-related Medicare premium.

Another way to avoid unnecessary costs is by filing a “change in circumstance” with Social Security in the case of a life-changing event that could affect income.

“Every year [Social Security is] going to look at people’s income to determine [their Medicare] premium, but people may have had a change in circumstance since the tax return was filed that Social Security is using,” Votava said. Adding, “A real common one around retirement is stopping or reducing work.”

Social Security considers a “change in circumstance” to be if someone marries, divorces or is widowed; stops working or reduces work; or loses income property due to disaster. Employer pension plan termination or reorganization and employer base settlement due to bankruptcy would also be considered a “change in circumstance.”

If someone is eligible for one of these circumstances, Votava suggests reporting it immediately to Social Security.

“People are granted the lower bracket – and therefore the lower premium – as long as they file within a 60-day timeframe because that’s what’s required,” Votava said.

Reverse mortgage

3. Reverse mortgages may be an effective tool to help pay for health care.

One strategy that could help clients not pay higher premiums is a reverse mortgage.

“It’s another tool or instrument … that really can be a benefit to many clients that are in their 60s going through this planning and trying to figure out how do we pay for health care?” Dickson said.

A reverse mortgage is a way for a client to monetize the home equity that they have built up over the years, Dickson said.

“What you might not realize is that the product that’s available in the marketplace, 99% of all of what are known as reverse mortgages are actually in fact a Home Equity Conversion Mortgage (or HECM) that’s backed by the [Federal Housing Administration],” he added.

To qualify, clients must be 62 years old, and the house must be their primary home and currently lived in. A HECM is available for single-family property, HUD-approved condo or up to four-unit home.

“[HECM] can be used to provide additional guaranteed income or you can put a credit line in place,” Dickson said. “I think that’s a great use, especially working with planners all over the country they love the credit line as a hedge for those clients that have possible health care issues.”

—Related on ThinkAdvisor: No Social Security COLA in 2016: Higher Medicare Premiums for Your Clients


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