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.

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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