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COBRA Call Option

Logan Murray

I QUIT MY JOB last year and then found I needed medical care. My old employer was required to offer me health insurance—but it was expensive. Luckily, I found a loophole that allowed me to obtain the coverage I wanted at a bargain price. I got the treatment I needed, and saved almost $1,000.

First, a bit of background. More than half of the U.S. adult population gets health insurance through their employer. Indeed, according to a Gallup survey, one out of six adult workers with employer-based health insurance remains at an unwanted job because of the health benefits. But there are ways to get health coverage if you leave your job, one of which is provided by the Consolidated Omnibus Budget Reconciliation Act (COBRA).

In essence, COBRA lets you continue your employer coverage for a certain amount of time, usually 18 to 36 months. The length of time depends on your age and reason for leaving.

The downside—and why COBRA has a negative reputation—is it’s expensive. You get to continue health insurance coverage, but at full cost. Any subsidy your employer was providing no longer applies. You will likely pay up to 102% of the actual cost of coverage. This creates expensive monthly premiums just to keep the policy—coverage you won’t use if you remain in good health.

But COBRA also has an intriguing feature: a 60-day window to elect coverage. This creates what some call “free” coverage, but I think it’s better viewed as a free “call option” on health insurance. You have the right, but not the obligation, to claim health insurance retroactively. If you elect COBRA at any time within 60 days after losing coverage, the coverage is retroactive to day one, as if your health insurance never lapsed.

The strategy here is to do nothing. COBRA is your safety net should medical costs arise. But if you’re perfectly well for 60 days, you don’t need to buy the policy and pay for insurance you didn’t use. Instead, at the end of the 60 days, you might purchase coverage through, say, your state’s health care exchange.

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Here’s how this worked for me. I quit my job at the end of August 2020. I knew I had a looming oral surgery, but nothing was scheduled when I quit. Soon after leaving, my surgery was scheduled for the end of October—59 days after my last day of employer coverage.

I looked into private dental insurance plans. I found most have a 12-month waiting period for major services, so that wasn’t an option.

On my first glance at the COBRA paperwork, I ruled out coverage because the premium would be more than $500 a month. But on closer inspection, I realized that I could separately elect health, dental and vision insurance.

Dental insurance by itself turned out to be just $33 a month. In late October, I elected dental coverage at a cost of $66 for two months. This gave me coverage for September and October. The policy had a $1,000 maximum benefit, which it paid me in full after my care. I subsequently dropped the coverage.

Is $1,000 a life-changing amount of money? No. But a $1,000 payout at a cost of $66 is a great return on investment.

COBRA is typically available from companies that offer health insurance and have at least 20 employees. Some states require even smaller firms to provide coverage, known as mini-COBRA. My recommendation: Read any documentation carefully so you understand your options.

Logan Murray is a solo financial advisor. His company Pocket Project offers subscription-based financial planning services to young professionals. For more financial insights, check out Logan’s blog or connect with him on LinkedIn.

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Bill Woolf
Bill Woolf
11 months ago

There is one other way one can use the rules to his or her advantage. If you choose coverage under COBRA up until the 60th day, you have 45 days after opting in to make the first payment. So it’s possible to hold onto coverage for up to three-and-a-half months without making a payment. Of course, if you wait that long, the first payment will be huge. I have known people who used this route to cover themselves in arrears if a medical need arose before they started a new job with medical benefits.

It’s the only time of which I am aware that you can buy medical insurance retroactively if it turns out that you need it. It’s not cheating–the rules are written that way.

Rick Connor
Rick Connor
11 months ago

Nice article Logan. This strategy worked for my kids when they graduated from college. You could “cover” the span of time from graduation until they started jobs. this was pre-ACA when dependents were dropped the day of graduation.

I think one other benefit of COBRA as opposed to signing up for new coverage – you continue your deductible at the point you left employment. With new coverage your deductible starts over.Just another consideration.

R Quinn
R Quinn
11 months ago
Reply to  Rick Connor

Good point.

R Quinn
R Quinn
11 months ago

Good strategy for the individual.

When people see the cost of COBRA continuation coverage they are shocked. It’s likely the first time they learned the full cost of their employer benefit beyond their payroll deduction.

COBRA is not separate insurance though, it’s what coverage the employer group offers, often with benefits not available with private insurance.

No doubt the law was written to provide the flexibility of using and dropping coverage, but most people don’t realize that the financial hit isn’t absorbed by an insurance company, but by the employer group because the employer is self- insured or experience rated.

The people who took COBRA did so because they anticipated large medical bills, but with ACA the need for COBRA changed – except when the employer plan offered very good benefits.

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