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Sometimes the Less Expensive Option Costs You More

There’s nothing earth-shattering in my title. Yet, I see it every day in my professional life. Two recent examples have proven it again.

The first was an income tax client who moved from New York City to Palm Beach County, Florida. He is above 65 and on Medicare. Not wanting to pay for a Medicare Supplement plan, he opted for a Medicare Advantage Plan with a small additional premium over Medicare Part D, and it has a built-in prescription drug plan.

If you have a family history of people who are relatively healthy and die quickly, then the Medicare Advantage plans, which are essentially a HMO (sometimes a PPO), are a great option. But how many of us know what our health will look like as we age?

Notice how I said HMO? The network in New York City is not the same as the network in Delray Beach and Boca Raton. So, the inexpensive plan is no longer inexpensive when there’s no coverage, unless it’s an emergency.

Better Options Than a Medicare Advantage Plan

What would have been the better solution? The more expensive Medicare Supplement plans, such as Plan F, Plan G, etc. Another client bought a Plan G from me a few years ago when she was a Pennsylvania resident. Today she lives in Connecticut. No interruption in coverage for her. If the doctor or facility accepts Medicare, they must take her plan. As luck would have it, she wound up needing heart surgery. Everything was covered, except her private room in rehab. She had to pay extra for that, but that was her choice. If she took a semi-private room, she would have had no out-of-pocket costs. (For related reading, see: Medigap Insurance: Who Needs It?)

There are other reasons, using the examples above, why one should opt for the supplemental plan—even if they don’t plan on moving. But the comparisons between Medicare Advantage and Medicare Supplement plans are worthy of their own article. In the example of the woman who moved to Connecticut, some of the less-expensive (based on premiums) Medicare Advantage plans may have left her with $6,000 to $7,000 of out-of-pocket expense for a semi-private room. Ouch!

Long-Term Care Insurance Costs

Here is example number two to support my point. A couple in New Jersey was interested in planning for long-term care. They did not want to buy traditional long-term care insurance, knowing full well that they were in their 50s today and the premiums will just escalate as they aged. I found them two life insurance policies with long-term benefits. Both insured two lives on one policy, and both were true long-term care riders. Both had the same death benefit of $500,000. Both locked in premiums.

One policy was $1,270 a year more than the other. Which one was less expensive? If you said the more expensive one, I owe you a cigar. Well, maybe not. Cigar smoking will raise your insurance costs, but I digress.

What made the more expensive policy less expensive? The more expensive policy (based on premiums) was paid up in 20 years (no more premiums after that). It also built up a cash value that can be forecasted using guaranteed projections. The less expensive policy, based on premiums, was a life pay and did not build up cash values. (For related reading, see: How Cash Value Builds in a Life Insurance Policy.)

Let’s say both are alive and healthy in 30 years. Remember, they are in their 50s now, and we know there are many people alive today who are in their 80s. The "cheaper" policy would have cost $402,630 over 30 years and have nothing to show if they changed their minds. There is no cash value to borrow or withdraw. The "expensive" policy will cost $82,425 over 30 years.

We could get lost in the weeds on the benefits offered in each policy. The more expensive one that is actually less expensive, is more robust and offered an optional inflation rider. But that wasn’t the point. My point is the cost of ownership and not being cheap with your health.

(For more from this author, see: How to Plan Financially for a Chronic Illness.)