By Doug Criner

Many people would like to retire early, before age 65, but are concerned about health insurance until Medicare kicks in. Fewer private employers will provide medical coverage to their retirees, and often the ones that do merely offer to let their retirees continue their insurance at very high rates.

Major Medical Policy

An alternative is to purchase a major medical policy with a very high individual deductible, such as $10,000 per year. The concept is that if you’re retiring early, you should be able to pay, out of pocket, your routine medical expenses. Even if you never collect a penny from the major medical insurer, you can participate in the insurer’s preferred provider network. Thus, you have your health care providers submit claims to the insurer, who in turn discounts the bills by up to 50% for in-network expenses, and then disallows the rest of the claim because you haven’t met your annual deductible. The health care provider then bills you for the in-network discounted cost. The in-network discounts may likely approach your annual premiums, so in a sense you have a discounted health insurance premium.

A word of caution:  you do not want a short-term major medical policy which must be renewed every six months or so. If you come down with some dread disease, you can bet that you policy won’t be renewed.

Even so, your major medical policy will only be issued after completing a health history form. Expect that the insurer will request documentation from your doctors and will exclude pre-existing conditions for 24 months or so. Thus, if you have a pre-existing condition that could likely manifest itself into an expensive illness in the first two years of coverage, then you’re out on a limb.  On the other hand, if your pre-existing conditions consist of hemorrhoids, fallen arches, and jock rot, you might not be at too much risk.

Adverse-Selection Game

The annual premiums for such a policy are much less than a comprehensive, low-deductible policy. By having such a large deductible, you can successfully play what insurance underwriters call the "adverse-selection" game:  the people who choose low deductibles are typically unhealthy, having babies, or heavy users of the health care system; so they should, and do, get rated as higher risks.  If you really need complete coverage, including prescriptions, $10 co-pays for office visits, dental, and eye exams, then maybe you should keep working someplace where the healthy suckers or the company will subsidize your health care.

The premiums for the type of policy I’m suggesting can be increased each year, but only for your whole class of insureds, not for you alone. And remember, you only need the coverage until you (and you spouse) qualify for Medicare.

The timing for establishing such a major medical policy is a little tricky. You will want to have satisfactory coverage in place before you cut the umbilical with you employer. Also, medical insurers typically will not issue a policy unless you can prove that you presently have medical coverage in place, presumably your coverage through your employer. Many insurers don’t want you to have double coverage, so once you have your major medical policy in place, you may be expected to cancel your other coverage.

 Doug Criner 2002