Is It A Good Idea to Buy COBRA Insurance?

Is It A Good Idea to Buy COBRA Insurance?

Often times, it is advisable to purchase benefits under COBRA when they are available.  Your employer may have a very high-quality plan and may have secured excellent rates based upon their good loss experience and market power.   In order to fully answer the question “Is it good idea to but COBRA Insurance,” we will cover:

  •         A definition:  What is COBRA?
  •         Eligibility:  Who is Eligible for COBRA?
  •         Cost:  How much does COBRA cost?
  •         Alternatives:  What are the alternatives to COBRA?

What Is COBRA?

In 1986, congress passed the Consolidated Omnibus Budget Reconciliation Act, which from here forward we will refer to as “COBRA.”   The act contained health benefit provisions which provide for the continuation of group health coverage under certain circumstances.

Qualified beneficiaries under the law must be offered the chance to continue coverage identical to that offered by the company to similarly situated beneficiaries who are not receiving COBRA coverage.  The charge for those benefits can not exceed 102% of the cost that other employees are paying for the same coverage (without the employer subsidy).   So, if you were paying $400 per month for your group health benefits, and your employer was contributing $600 per month, you can be charged no more than $1,020 per month for your coverage under COBRA. ($600+$400) * 1.02 = $1,020.

In most cases, qualifying beneficiaries are able to purchase continued health benefits under COBRA for 18 months.

Who Is Eligible for COBRA?

There are three qualifiers you must meet in order to be eligible for the continued purchase of group health benefits under COBRA:

1)    Your employer must be subject to the law.  Generally, the law applies to employers with 20 or more employees, who offer group health plans to their employees;

2)    The individual(s) seeking coverage must be qualifying beneficiaries.  Generally, this would be an individual who was covered by a group health plan on the day before a “qualifying event” who is either an employee, the employee’s spouse, or the employee’s dependent child.  In addition, any child born to or placed for adoption with a covered employee during the period of COBRA coverage also generally qualifies.  In some cases, retirees, their spouses, and their dependent children may qualify.

3)    Qualifying events are certain events that would cause an individual to lose health benefits under the employer plan.  The type of event determines who will qualify as beneficiaries and the amount of time that they will be eligible to purchase continued health benefits under the group plan.  While employers who come under the law must offer continuation of benefits for the period of time required under the law (most often 18 months), they can offer coverage for a longer period of time if they wish. (most don’t)

Qualifying events for employees include:

  •         Voluntary or Involuntary Termination of employment for reasons other than gross misconduct;
  •         Reduction in the number of hours of employment.

Qualifying events for spouses include:

  •         Voluntary or Involuntary termination of the covered employee’s employment other than gross misconduct;
  •         Reduction in the number of hours of the covered employee’s employment;
  •         The covered employee becoming entitled to Medicare;
  •         Divorce or legal separation from the covered employee;
  •         Death of the covered employee.

Qualifying events for dependent children are the same as for the spouse, but with one addition – loss of dependent child status under the plan rules.

How Much Does COBRA cost?

As mentioned earlier, you can be charged no more that 102% of the sum of the normal employee cost + the normal employer contribution.   When purchasing coverage under COBRA, while you no longer get the benefit of any employer cost subsidy that you may have previously enjoyed, you do get the continued benefit of your former employer’s group buying power.

What Are The Alternatives To COBRA?

While you may have the option to continue health coverage under COBRA, there are other alternatives.

  •       Based upon your age, state of residence, and income, you may be eligible for some form of State or Federal medical assistance or program.  You can conduct research on what may be available in your particular state and circumstances.  This is beyond the scope of this article;
  •       You may be able to purchase coverage through a private insurer, either online or through an agent.  The downside here is that you must meet the underwriting criteria of the insurer and you no longer have group buying power.   If you have a poor health history or significant pre-existing conditions, you may be ineligible, the plan offered may be very restrictive, or the cost may be unaffordable.   If you are in good health, then you may be able to obtain rates that are lower than the premiums charged under COBRA.

However, you need to read the fine print on the coverage, the deductibles, in and out of network benefits, and what is covered under the prescription drug plan.

  •       You can purchase coverage under the Affordable Care Act at http://www.healthcare.gov (or one of the state health insurance exchanges which you will find there).   There are a number of choices and benefit levels available.   The good news is that there is guaranteed insurability, so if you have a pre-existing condition or poor health history, you will be able to secure coverage.   However, the pricing you will find here may not compare favorably to what you may be able to secure on your own through the private marketplace.  

The good news is that you might qualify under the plan for a subsidy or credit.   The website will walk you through application for and eligibility for such credits or subsidies and will show you what you may qualify for.

Should I Buy COBRA?

Continuing to purchase your benefits through COBRA might be the best alternative for you.   As explained above, there are other alternatives.   As a wise consumer, you should explore the other options that are available to you and compare the costs and the benefits provided.  

One benefit of purchasing your own coverage, outside of COBRA, is that you can select a plan that meets your individual needs.  You may not want or need many of the coverage features that are built into your employer’s plan.  You may not care about drug counseling, health club discounts, and various other benefits.   You might be comfortable purchasing a slimmed down plan, and the cost of such a plan might be attractive.

While large employers have group purchasing power, their costs are based upon the experience of the plan participants and the breadth of coverage provided.   If you work with a company that has a lot of older or unhealthy employees, their experience might be poor.  As a result, the costs of their insurance plan might be higher than what you could purchase on your own.

Additionally, if you are young and healthy, there is a decent chance you may be able to find a better deal on your own.

If you do not have the time to shop around now, it is highly advisable to register for and purchase the benefits under COBRA until you have had the chance to explore alternatives.   If you find a better plan elsewhere, you can always discontinue your coverage under COBRA at a later date.   Once you elect to discontinue your benefits under COBRA, you will not be able to sign back up.   So, it is important that you are sure that other coverage is in place, and that you have been approved by underwriting, before you terminate your coverage under COBRA.

This article is only a summary and does not properly address every possible situation.  Also, rules and coverage alternatives may vary by state.   It is recommended that you discuss the specifics of your individual situation with a professional insurance agent or other qualified professional.   If you want assistance with the Affordable Care Act, there are trained “Navigators” available to help guide you.  Additionally, you can find more information about COBRA at the U.S. Department Of Labor website.  

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Jim Ketterson is an insurance expert with more than 25 years of experience in the industry. He has served as a President of an insurance company, an insurance underwriter, and has held various roles in insurance company product management. He has his Chartered Property Casualty Underwriter designation and a MBA in Finance. The information he offers in his posts is general in nature and may not be appropriate, accurate, or applicable in all situations. Before making any important insurance decisions, you should seek the advice of a qualified insurance agent and discuss the particulars of your individual situation. Follow Jim on Twitter @MNinsurancePro

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