What is COBRA Insurance?

    Health insurance umbrella COBRA stands for the Consolidated Omnibus Budget Reconciliation Act. While that may not sound like it has anything to do with health insurance, it’s actually a federal law designed to help you and your family avoid a gap in health coverage after a job loss or a reduction of hours that makes an employee ineligible for insurance coverage.

    If you’re in a situation like this, you’re probably already creating a survival-mode budget while you figure our your next steps. Taking care of your family comes first, even in a survival budget, and COBRA or some other form of health coverage should be a part of it. A gap in insurance coverage puts you at risk of incurring the total medical costs of any care you may need, like treating a sudden illness or unexpected surgery. Without insurance, this is often a financial disaster for a family.

    Who is Eligible for COBRA?

    To be entitled to COBRA, your company’s group health plan must be a COBRA participant (most are).

    As the employee, you are eligible for COBRA if:
    • You leave your job voluntarily (this includes retirement).
    • Your work hours are reduced so that you are no longer eligible for health benefits under your employer’s policy.
    • You lose your job for any reason other than gross misconduct.

    Eligibility is similar for spouses and dependents but there are some additional situations in which their own coverage as part of the insured person’s policy coverage may make them eligible for COBRA as well.

    The employee’s spouse is eligible if:
    • The employee’s work hours are reduced
    • The employee leaves the job for any reason other than gross misconduct
    • The employee becomes entitled to Medicare
    • Files divorce or legal separation
    • Death of the employee
    Dependent children are eligible if:
    • The employee’s work hours are reduced
    • The employee leaves the job for any reason other than gross misconduct
    • The child loses dependent child status under the employer-sponsored health plan’s rules
    • The employee becomes entitled to Medicare
    • Parents divorce or legally separate
    • Death of the employee

    Qualifying events for COBRA are only events that affect your employment status. If your employer decides to change the type of insurance coverage they provide, but you like the previous one better, that won’t count. It’s only when you become ineligible for the employer plan through a reduction of hours or termination of employment.

    The exception to this rule is when a business closes. While it does change your employment status, there is no longer an employer or an employer health plan. That also means no COBRA option exists either.

    How Long Does Coverage Last?

    COBRA is not meant to be a long-term solution. It is only meant to fill the gap between losing one health insurance plan and obtaining another.

    Your employer must provide you with notice that COBRA is available when a qualifying event has occurred. You then have 60 days to determine whether to continue coverage through COBRA. If you do elect COBRA, your coverage extends from the date of the qualifying event for a period of 18 months. An extension of up to 36 total months is possible when a qualified beneficiary is disabled or a second qualifying event occurs (like the death or divorce of the covered employee) during the initial 18 months of coverage.

    How Much Does Coverage Cost?

    In 2017, the average annual premium cost for employer-sponsored health insurance was $6,690 for individual coverage and $18,764 for family coverage. But employers covered 82% of the costs for individuals and 69% for families on average.

    When you opt for COBRA coverage, you’ll no longer receive the employer contribution. The monthly premium will then be 100% of the cost of the plan plus an additional 2% for administrative costs.

    That’s a lot of money, but compared to the devastating effects of medical debts created if you’re uninsured and something happens, it’s an option worth considering. In fact, according to a Kaiser Family Foundation study in 2016, 52% of all debt collection actions in the U.S. contained medical debts, and nearly the same percent of bankruptcy filings were driven by medical debt.

    Not having insurance is a huge financial risk.

    Should I Use COBRA Coverage or a Different Health Care Option?

    When evaluating your health insurance choices, the four key factors to consider are premium costs, deductibles, copays, and coinsurance.

    1. Health insurance premiums how much you pay for the coverage itself each month.
    2. Deductibles — the amounts you pay before your plan begins to chip in.
    3. Copays — fixed charges you pay for doctor or specialist visits, some diagnostic services, and (often) prescription drugs.
    4. Coinsurance payments — generally begin after the yearly deductible has been met. At that point, the insurance company starts to pay a percentage of all costs.

    It’s a lot to consider, and things can get confusing when trying to figure out all the health insurance plans out there. Different plans have different coverage options and costs. High-deductible plans, for example, generally have lower monthly premiums, but that’s a trade-off for how much you could spend out-of-pocket if something catastrophic happens. What’s important here is to weigh your options carefully in time to either take advantage of COBRA or to get another form of coverage before you miss a deadline and experience a lengthy gap in health insurance.

    Depending on your circumstances and the Health Insurance Marketplace premiums you’re eligible for, COBRA may or not may not be your best option. The federal government assists with paying for Marketplace plans, but you’re on your own with COBRA premiums. Still, COBRA continuation coverage can be a great safety net if you experience a qualifying life event.

    Bill Fay

    Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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