53 – Playing the COBRA Insurance Game

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Episode Overview:

These are trying times we’re living in. As the COVID Pandemic spreads, many people have been laid off from work. Ken decided the best way to help those laid off is to share his knowledge and hacks about the COBRA Program. The COBRA Insurance Law offers up company insurance for a short period to people who have been laid off. Ken shares why COBRA is notoriously expensive and recent updates to the program. Ken also shares timing tricks that you can use to greatly leverage the program to your benefit.

Transcriptions are auto-generated, please excuse grammar/spelling!

Happy day to you. This is Ken Kaufman and I’m thrilled you’re here for episode number 53 “Playing the COBRA Insurance Game.” We’re in difficult times. There are many people across the country and throughout the world that are being laid off from their work or are being changed from full-time to part-time status. Now, I thought about what could I do on this podcast to try to help give some thoughts and some direction about how to help some of the critical decisions that are gonna land on these folks who have gone through this either reduction in work or, you know, removal of work altogether. I realized I could probably take some of my experience and help give some information and education about how to play the COBRA game and how to use it to win, and possibly put some money in your pocket and make sure money stays in your pocket while you’re getting back on your feet and, really, while the economy is getting back on its feet.

So, let’s go ahead and jump in here. Just a brief summary. COBRA Insurance comes from an act that was passed and actually signed into law back many years ago. And it requires most employers…now, not all. There are some that are excluded, but most employers need to offer access to continued health insurance coverage through the company-sponsored health insurance plan to people who are terminated and lose their benefits, or perhaps you’ve lost benefits because you’ve been switched from a full-time to a part-time role.

In today’s marketplace, COBRA Insurance has a really bad rap, and let me explain why. Most people talk about COBRA as being expensive, out-of-this-world expensive, the most expensive thing you could imagine. And the main reason is because we have been spoiled. Our employers have been covering…maybe it’s a small percentage, maybe it’s a pretty large percentage of what the overall cost is. And so, when we see how much COBRA costs, all that that is it represents what the actual total cost of the insurance is, and it reveals how much your employer’s been contributing toward it. Let me give you a quick example.

Let’s assume you’re being paid semi-monthly or that would mean twice a month. And you have $100 from each check deducted for your health insurance. So, that works out to $200 a month — simple and easy math. Now, let’s imagine that you find out that your COBRA through your work is gonna cost you $600 a month plus a $12 fee, which this…there’s a 2% admin fee. And I’ll just add here, employers generally in the law allows them to charge a 2% mark-up on the total premium for their administrative costs. As I go through this, you’ll see the employers actually have a fair amount of administrative effort to help this program work, and to make it available to their workforces when they are no longer covered under the health insurance.

So, there’s this 2% fee coming back. That works out to $12 on that $600 premium. And so, you find out that, “Wow, my COBRA costs $612. I was used to paying $200, $12 was the admin fee. My employer was paying $400 towards my insurance.” So, relative to what you were paying, it feels expensive, but if you go and shop it, you may find that it’s actually…at $612, it might be a very competitive or maybe affordable rate relative to the benefits that you’ve been getting.

So, now we’ve got that kinda straightened out about why COBRA comes across as so expensive, let’s start to jump in and talk about how the math works in the COBRA game. And then we’ll get a quick summary, and as I go through this, I have an example. So, we’ll just kinda be running parallel with, here’s the new set of information we know about COBRA, and then how does that impact our example so that you can see how this works.

Once you have the event of unemployment or underemployment occur, and if your employer falls under the rules of COBRA, which most do — not all, but most — they have to send you something called the COBRA election notice. And this has to be sent generally within 30 to 45 days after you lose your coverage. So, let’s go ahead and jump into an example.

Let’s assume that you have lost your job. You’ve been let go as a result of the economic impact of what’s going on in our world today. And it’s March 31st. So, your last day of work is March 31st and the last day of your health insurance benefits are March 31st. This means that you will get your COBRA notification within 30 to 45 days of that event. So, between about April 30th and May 15th. It could come sooner. That’s just the maximum amount of time that your employer has to fulfill this part of the process. Once you receive the election notice, you have 60 days to respond. So, using our example, and going with the May 15th receipt of the election notice, and now you have 60 more days to respond. This means that you can wait to make your election to accept COBRA Insurance until about July 15th.

But remember, this process started at the end of March. We are now three and a half months away from your loss of health insurance coverage, and you know a heck of a lot more three and a half months later if you needed health insurance coverage than you did on, say, April 1st or even in April or May. We’re all the way out to the middle of July. It’s actually pretty incredible, and it’s part of how we can play a game to try to keep our resources and not spend them on something that won’t be beneficial to us financially or economically.

So, once you receive that COBRA election notice, you’ve got these 60 days to work with. And that puts us three and a half months out to the middle of July. If you elect coverage, you actually have another 45 days to pay the first premium. So, when we add all this up to our example, you don’t actually have to make the first premium payment until the end of August. That’s five full months after you lost the health insurance coverage. Now, your employer may send the notification out earlier. So, the 60-day window starts earlier, or there may be things that make it a little bit quicker in your process. The key thing is to know how to add up this math and know where your timelines are and not miss them.

One other point to make really quickly. COBRA Insurance, this is where you’re just staying on your employer’s plan but paying for the whole premium plus possibly a 2% admin fee. It’s not intended to be permanent. The coverage is definitely there for a minimum of 18 months, and then depending on what qualifying events occur and what the situation is, it could be available for up to 36 months. I won’t go into the details of how that’s figured out and worked, but if you put 18 months in your mind and then possibly twice that much depending on your situation, then that’s probably sufficient for now.

So, now that we’ve kinda got this groundwork laid, let’s talk about how we play the game. We have to start by understanding the numbers. First of all, you have to know how much your cost is going to be monthly for the COBRA Insurance. In our example, it’s $612. If you don’t wanna wait after you’ve separated from your employer, if you don’t wanna wait to find out the cost of COBRA, you generally can call your employer’s HR department, and you can find out how much COBRA would cost to continue the coverage that you had. If you had family coverage, they can give you that number. You can also elect to just cover yourself or self and spouse. It creates an open enrollment period and gives you the opportunity to get what you need. But you can go ahead and find out that cost.

Also, remember you have three and a half months or really 60 days from when you get that notice to make the decision if you want it, and then another 45 days after that. So, possibly up to five months total to make your first payment. And when you do something like that five months out, remember, your first…when you say you want to elect the coverage, it actually goes back and reinstates your coverage as if you were never terminated. So, it reaches all the way back to April 1st and makes you effective, and makes you effective for all that time moving forward.

Now, let’s jump into how…to some details of the game. One of the things you wanna do right off is you wanna get out to the marketplace. This is right after you’ve been laid off, before you’ve even gotten your election notice. You want to get some quotes for insurance. It would be similar or maybe even slightly better than what you have, and just compare them. So, you have a general flavor of what’s the cost of another similar program relative to what the COBRA is going to cost you.

Next, you wanna start setting $612 a month or whatever that premium is. Start setting that aside in savings or make sure you’ve got that saved somewhere if you already have your emergency fund. And you’ll understand why. And you want to make sure you do this every month through the process. Because, again, if you elect and you choose to pay and we’re five months down the road, not only are your benefits retroactive to your termination date. So, reaching back from the end of August to April 1st, you also have to back-pay all those premiums in order to get the coverage.

Now, during the first month after you lose your benefits, you’re gonna watch and see what’s happening with your medical bills without insurance. If you have no medical bills, then it doesn’t make sense so far to sign up for COBRA. Why would we bother? Or even if you have some minor bills. If you have significant bills and they far exceed the cost of the COBRA, then you’re starting to tell yourself, “Okay, I gotta keep an eye on this. But if the premium is gonna be cheaper than what my out-of-pocket costs are gonna be, then I should probably go with the COBRA Insurance.” But we have several months to play with here.

So, a good example here, you think $612. Let’s say you have to go to the doctor, and maybe there are some labs or an x-ray that has to be taken and maybe a prescription or two. Let’s say it’s a total of $250 that you would have to pay out-of-pocket, you know, without any benefits applied to that or without, you know, it being run through your benefits program. Well, really quickly, that’s easy to understand. Probably better to just pay the $250 to the service providers directly than sign up for the COBRA Insurance for $612. This is the beauty of the COBRA game. It allows you to have the potential coverage if you need it, but to play the game out long and potentially save yourself quite a bit of money.

Now, let’s go to May and let’s talk about what May would look like. In May, if you…you get your election notice, but you’re gonna hold onto it for 60 days. If you have lots of medical bills coming in and it’s just clear that paying the COBRA premium of $612 a month is just gonna be worth it, then you can sign up right away. But if you don’t have any or very low medical expenses to where it doesn’t make sense to pay the premium, then you can just wait. Wait until June. And then you get to June, and you can run the same math, and you can then defer your decision even longer. And now, all of a sudden, you have to make this decision around the middle of July about three and a half months later if the timeline works out exactly as I’ve described. And it could be different.

You can be sitting there in July and say, “I didn’t even have to go to the doctor. Nobody in my family had to go to the doctor. We had no medical bills, no prescriptions. Why would I sign up for COBRA?” But you could say, “Well, you know, I’m not sure. I think maybe something might happen.” And then you could go ahead and say, “Okay, I do wanna sign up.” And then you wait 45 days to pay your premium, which would push you to the end of August. If you don’t pay your premium, then the employer just, you know, scraps it. And they’ll reinstate you to coverage, but then it goes…they’ll terminate it once you haven’t paid your premium and it goes away. But really, you have up to this five-month window to work with.

And if you want… This is the beautiful thing about it. If you have low medical expenses, you now have this visibility where you can look back and you can see that you didn’t have nearly as much expenses as the COBRA would have cost. And so, you can just pass, and you can save all that money. You have access to coverage retroactive to the time your coverage was canceled. There’s no insurance on the planet that will pay for claims that have been incurred before you sign up for the insurance except for COBRA. This is the benefit, and this is the game.

Now, you have the ability to wait and see. And I believe that’s the true purpose of COBRA. It’s there for people who really need it. It’s not meant to be permanent, and it’s not permanent. But it can make a big difference to protect you and your family against significant or even catastrophic loss if there’s medical emergencies or, heaven forbid, some bad…you know, horrible diseases come along or anything of that sort.

Now, one note on the mechanics of how this works. If you elect the COBRA coverage, it is reinstated back to the beginning. You’re setting aside the premium so that you’re ready to pay those premiums. And you’ll be able to cover that. But there’s some administrative hassle around getting reinstated back because if you’ve been having claims, the doctors may have made you make…may have had you pay them or maybe you’ve told them, “Hey, I’m gonna be signing up for this insurance. Wait to bill me.” What’s gonna happen is the claims you haven’t paid for, you can have those providers submit once you’re active on the health insurance, they can submit those claims regardless of how old they were. They’ll get processed and those providers get paid. But if you have paid for any of those out-of-pocket, your providers may need to submit the claims and get paid, and then reimburse you, or in some instances, you can go straight to your insurance company, and submit the information. And they will pay you back directly so that you’re made whole.

So, there is some administration. In almost every scenario that I’ve seen, the game is absolutely worth paying as long as you don’t miss these election timelines, and you keep up with the administrative effort of it all. It really is worth it.

And if you think about this example where we have $612 a month of premium over five months, that’s $3,000. And if you have just a couple hundred dollars of health insurance expenses or, say, you even have none…or not health insurance, but medical expenses, let’s say you even have none, you could have saved that whole $3,000 and not have thrown it away at insurance. Now, when this all ends and you don’t have the ability to stretch this game out any further, you should probably go and get insurance because you now no longer have somebody who will retroactively go back and pay all claims after you’ve decided to sign up for it. And so, you’ve gotta be careful about that. Make sure that you’ve got, you know, the right coverage for your family and everything’s in place as you need it.

So, there is some administration, some tracking, but it could potentially be worth, in this scenario, $3,000. In some cases, premiums can be up as much as $1,000 or $1,500 a month. And there’s obviously significant savings well above the example that I’ve shared.

So, if you’re getting a COBRA notice, chances are that you’re out of work or under employed, and you could use the opportunity to save this money. And that’s why I’ve gone through this example to explain the game of COBRA.

So, that’s it. That’s how you play it. That’s how it works. As I’m signing off here, I wanna send my best to all those in the healthcare and the dental professions. They are on the frontlines fighting the coronavirus, putting themselves potentially at risk, and doing everything they can to help keep us safe and healthy, our families, our loved ones, our friends, and really, all of our brothers and sisters around the world. I express my gratitude to each of you. Many, many thanks to you for joining today. This is a wrap for episode 53. Happy day.

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About the Podcast

Join Chief Financial Officer Ken Kaufman as he helps you track and hack your net worth. For those seeking financial independence, your net worth is one of the most significant measurements of success. Using his two decades of financial experience, Ken Kaufman helps you overcome your financial obstacles and look onward towards a better, brighter financial future.

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