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The embedded free option in COBRA

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Everyone on the block knows I’m a financial planner so I’m used to fielding a variety of questions about mutual funds and 529 plans when I take out the garbage. Today, I got a question about health insurance.

The husband in his family left his old job October 31 and health coverage through his new job doesn’t start until January 1. They just got a huge bill for COBRA coverage and they were wondering if they have to pay it. The answer turns out to be no, not unless they have some major health expense between now and the start of their new coverage.

With COBRA, you get 60 days to decide to use it and another 45 days after that to actually pay. If you don’t pay, they don’t have to cover any expenses you had.

The 60 day clock starts running when you get your Cobra notice (which can be up to 6 weeks after you leave your job, depending on how on the ball administrators are) but the coverage will be retroactive to the day you actually quit.

So for people who have their next health insurance lined up, the clear strategy is to wait until the day the new coverage starts to decide whether or not you wanted health insurance. If your expenses were more than the insurance premium, pay the premium. If not, skip it.  You can even cherry pick which family members you wanted covered. The wife breaks her arm – she gets covered. The kids manage to stay healthy – they don’t get covered.

The only really downside I’ve come across is that your insurance card, while theoretically valid, may not be “live”,which could be a hassle. On a practical basis, most of the health providers in this area do not actually do anything with your card except make a photocopy of it until they are ready to send out a bill. This is not true of pharmacies, however, and you will have to pay the retail price and later get reimbursed if you decide you wanted insurance.

If your new insurance will start more than 2 months after you left your old job (this time period is for California residents), you need to think carefully about whether you will have problems getting pre-existing conditions covered because of a lapse in coverage and have a nice chat with the new benefits person at your work.

If not, you’ve got a free option.

Some further reading:

The California Patient’s Guide

FAQs About COBRA Continuation Health Coverage

The usual disclaimers about everyone’s situation being unique apply.

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