Should You Buy a Medigap Policy?


Given the endless, meteoric rise in healthcare costs, few retirees get excited about paying for what Medicare doesn’t cover, especially since there’s no out-of-pocket maximum. For most people, that leaves two options: buy a Medigap insurance policy or enroll in a Medicare Advantage Plan. Today, we’ll examine Medigap policies to determine if this option is right for you.

What Is a Medigap Policy?

Medigap insurance is officially known as Medicare Supplement Insurance. It’s exactly what you’d expect: an insurance policy you buy in addition to Medicare to supplement the “gaps” it doesn’t cover. These gaps can include copayments, coinsurance, and deductibles.

To purchase a Medigap policy, you must first sign up for both Medicare Parts A and B. There’s no medical underwriting during the first six months you’re enrolled in Medicare. This can be an important deadline if you have any underlying conditions.

Anytime you have healthcare costs, Medicare will first pay its share of those expenses. It will then forward the claim directly to your Medigap insurance company which pays its responsibility of the remainder of the bill. There’s no paperwork required on your part to make all of this happen.

Types of Medigap Plans

In 2021, there are ten flavors of Medigap policies you can choose from, depending upon the type of coverage you need, each identified by a different letter of the alphabet. Each plan covers 100% of Medicare Part A coinsurance and 365 days of hospital costs beyond what Medicare covers. Outside of that, each plan offers varying coverage for differing costs such as Part B coinsurance, skilled nursing care, and foreign travel emergencies.

To protect consumers and ensure consistent coverage, federal and state laws standardize these plans. No matter where you buy your policy, the coverage you receive with the plan you choose will be the same no matter the insurance company that sells it. While each company’s Medigap Plan A provides the exact same coverage, some companies may be easier to work with than others.

Plans F and G are the most popular. Around 50% of people who buy a Medigap policy go with plan F, while 22% choose Plan G. It’s interesting to note that these are the two plans that offer the most coverage (and have the highest premiums).

Benefits of a Medigap Policy

One of the highly appealing aspects of a Medigap policy is that it is “guaranteed renewable”. This means that, no matter what health issue may appear in the future, you can continue your coverage so long as you pay your premiums. The insurance company cannot drop your coverage or raise your rates. For anyone with a pre-existing condition, this is a lifesaver.

Another benefit of Medigap policies is that policyholders have access to nationwide healthcare coverage, so long as they use Medicare-approved healthcare providers. This is a very attractive feature for people who travel frequently or have a second home in a different state.

Speaking of travel, some Medigap policies offer coverage for emergency healthcare expenses abroad. If you do plan to travel during retirement, this is a great option in case you pull a hammy climbing the Eiffel Tower.

When it comes to dealing with the healthcare system that we all know and love, Medigap policies offer plenty of flexibility. You do not need a referral from a primary care physician to see a specialist. This alone may be the reason so many retirees choose them.

Since Medigap plans are standardized, your benefits will not change from year to year, unlike Medicare Advantage Plans. You’ll have a good idea of what any given procedure will cost since your coverage is clearly defined, even if Medicare deductibles change. Who couldn’t use a little predictability these days?

Potential Drawbacks

The most glaring drawback of a Medigap policy is the lack of prescription drug coverage. Because Medigap plans were created when Medicare was signed into law, no outpatient drug coverage was included. Remember, Medicare Part D began in 2006. If you choose to go the Medigap route, you’ll need to choose a Medicare Part D plan that fits your needs.

While Medigap plans may have more attractive features than Medicare Advantage Plans, they tend to be more expensive. However, they are not completely unaffordable in the same way that long-term care policies have become. While the coverage of each type of Medigap plan is standardized, the policy premiums are not; we can expect them to increase with inflation just like everything else.

Finally, if you find that your current policy isn’t working out for you, changing from one Medigap policy to another can create problems. Medical underwriting is required once you’re out of the initial six-month window for signing up. If you have an underlying condition, you may not be able to change policies without paying much higher premiums.

Should You Buy a Medigap Policy?

Since prescription drug coverage is included in most Medicare Advantage Plans, that may be the deciding factor for some retirees. While relatively few people end up going with the Part C plans, insurance carriers have been working hard to make these plans more attractive in recent years. Most Part C plans include vision, dental, and hearing coverage, which is nice.

For most retirees, however, Medigap policies are a good fit. Around 80% of Medicare enrollees end up buying a Medigap policy to help cover healthcare costs. If you travel frequently, have relatively low prescription drug costs, and want the ability to see specialists without a referral, the flexibility of a Medigap plan makes them awfully attractive.

If you have an underlying condition, the guaranteed renewable feature of Medigap policies can significantly reduce your overall healthcare expenses in retirement. Choose carefully, however. Once you’re out of the initial enrollment period, changing policies could result in higher premiums or lost coverage.

If you need help planning for healthcare costs in retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation. We often mention books and other products that we feel might find helpful. Wherever possible we use referral links; if you click one of the links in this video or description and make a purchase, we may receive a small commission or other compensation. We participate in the Amazon Services LLC Associates Program, an affiliate advertising program designed to allow us to earn fees by linking to and related sites.
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