Retirees and those nearing retirement typically have plenty of health insurance plan options. But sorting through a litany of allowances, exemptions, and other fine points is overwhelming. Many people understand the concept of long-term insurance, but short-term insurance plans are often less understood.
Here’s what you need to know about the benefits, drawbacks, and potential alternatives to short-term insurance plans.
What Is a Short-term Insurance Plan?
Short-term insurance plans, as the name suggests, provide coverage for a specific period, typically six months to a year. They can be activated for as short a term as 30 days.
Before delving into specifics, it’s important to note the various types of short-term insurance options. These are:
- Indemnity plans reimburse you for covered medical expenses up to a certain limit.
- Managed care plans provide benefits through a network of doctors and hospitals.
- High-deductible health plans have lower premiums but higher out-of-pocket costs.
The Short-term Insurance Target Market
Short-term insurance plans can be particularly appealing for workers between jobs, waiting for employer-sponsored coverage to begin, or who need temporary coverage. These plans can be an attractive option for retirees or those nearing retirement. They’re flexible, typically have lower premiums than traditional policies, and people can customize them to their needs.
“They can provide coverage for a set period. This may be helpful if you only need coverage for a specific event, such as travel,” said Loran Marmes, owner of Medicare Solutions Team, a Watertown, Wis. agency specializing in Medicare supplement plans.
Short-term plans also help bridge the gap between retiring without insurance to the start of Medicare eligibility, explains Andrew Rosen, president of Diversified LLC, a financial planning firm with offices in Delaware, Pennsylvania, and Alabama. “They’re often used as an alternative to COBRA or while waiting for an open enrollment,” he said.
Established in 1986, The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides for workers and their families who have lost their health benefits. COBRA allows them to continue group health benefits provided by their group health plan for a limited period. Only certain circumstances make workers eligible for COBRA. These circumstances include job loss, reduced work hours, job transitions, death, divorce, and other qualified life events.
COBRA applies to health plans of businesses with 20 or more employees. Several states have passed similar laws for smaller employers.
These plans typically have lower premiums than traditional health plans. As a result, “they can be a good option for people who need temporary coverage but don’t want to pay the high costs of traditional health insurance,” suggests Oberon Copeland, CEO of Veryinformed.
Where Short-Term Insurance Plans Come up Short
While short-term insurance plans can be beneficial in certain situations, they do have some potential limitations and drawbacks, particularly for people with health problems and preexisting conditions. There are other potencial downsides as well.
High Denial Rates and Deductibles
“You may get denied short-term insurance, or you may not have the amount of coverage that you need,” Rosen warns.
That’s because these insurance plans do not have to comply with ACA requirements for essential health benefits and preexisting conditions. Subsequently, they may offer lower premiums than ACA-compliant plans.
Coverage Limitations
“Short-term plans typically have much higher deductibles and do not cover preventive care, prescription drugs, or mental health and substance abuse services,” cautions financial blogger Eric Miller.
Short-term insurance plans won’t offer full coverage, emphasizes insurance broker Mike Montgomery of Tampa, Florida. “Coupled with a rider, it can operate like a full coverage option, but it isn’t full coverage,” he said.
Short-term plans also typically lack out-of-pocket maximums. The vast majority of claims—over 80%—are denied, according to Montgomery, who counts nearly 4,000 clients nationwide.
“This can be due to a myriad of factors, but two major ones are the quarterly look-back period/renewal and the underwriting on the back end,” he said.
Most short-term health plans are not renewable. They typically carry application restrictions within 365 days of prior coverage.
Due to limited benefits compared to traditional plans, short-term insurance may be a particularly bad option for the following groups of consumers, according to Marmes.
- Those with preexisting conditions. If you have underlying health issues, you’ll likely pay out-of-pocket.
- Pregnant women or women planning pregnancy. These policies typically don’t include maternity coverage.
- Those seeking preventative care. High deductibles equate to more out-of-pocket expenses.
- Those seeking mental health or substance abuse services. Most short-term plans exclude these types of services.
“If you’re healthy, have no preexisting conditions, and don’t anticipate needing any major medical services, then a short-term health insurance plan might be a good option,” Marmes advises. “However, if you have chronic health concerns or anticipate needing significant medical care, you’ll likely be better off with a traditional health insurance plan.”
Alternatives to Short-Term Insurance
Given the limitations of short-term insurance plans, retirees and those nearing retirement might consider some other options.
Medicaid and Medicare
If you haven’t aged into Medicare yet, Medicaid, which covers more than 80 million Americans, could be a viable choice.
The program, jointly funded by the federal government and individual states, covers eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities. States have additional options for coverage and may include other groups.
“If you qualify for Medicaid, you’ll get far better coverage than you would with a short-term plan,” asserts certified financial planner Joel Ohman. “Medicare also offers superior coverage, so you shouldn’t consider a short-term plan if you qualify for Medicare.”
The Affordable Care Act Marketplace
If you have preexisting conditions, Ohman recommends considering a plan from an insurance marketplace created through the Affordable Care Act (ACA), which prohibits denying coverage for those medical illnesses.
“Even a high deductible plan on the marketplace will cover preventative care,” he said. “And high deductible plans tend to be the lowest-priced plans in the ACA.”
Potential applicants can check for special enrollment in ACA plans. These sometimes allow consumers to purchase traditional health insurance through the marketplace if they experienced a qualifying life event, according to Melanie Musson, a health insurance expert in Montana.
COBRA
Musson suggests COBRA plans as another alternative.
Qualified individuals, however, may pay the entire premium for coverage up to 102% of the plan’s cost.
“COBRA insurance plans are usually an option if you had health insurance through your employer and then left employment there,” Musson said. “Even though COBRA plans tend to be expensive, they typically offer a higher level of coverage than a short-term plan.”
Since many retirees are no longer eligible for employer-sponsored health insurance, short-term health insurance plans can provide a bridge to some health coverage while waiting to enroll in a public option.
“However, it is important to be aware of the limitations of these plans before signing up,” asserts financial analyst John Brown.
Seniority is published by Finance of America Reverse LLC. The views expressed in this publication are those of the author alone and do not necessarily reflect the views and opinions of Finance of America Companies. This article is intended for general informational and educational purposes only and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
