Supplemental Health Insurance

Growing need for supplemental coverage

The demand for supplemental health insurance has grown steadily over the past decade and is now expected to expand further as a result of 2010's health reform laws. The primary demand stems comes from changes in employer-provided health plans that cover more than 60% of all Americans.

Employers that sponsor major medical plans tend to trim the plan benefits each year to combat increases in health care costs. More than 2/3 of companies polled expect to take this route over the next year. The expansion of Health Savings Account plans means that more families are uninsured for their first $5,000 to $6,000 of medical costs each year. Unfortunately few people can afford to pay the deductible from their personal funds. In these cases, supplemental coverage that has no deductible fills in those gaps in coverage.

Small companies and retail businesses often use a "mini-med" type of employer-provided health insurance. These defined benefit policies typically pay a fixed amount for doctors visits, hospitalization, emergency room visit, ambulance service, etc. that is less than the full cost of the treatment. The maximum coverage amount typically works out to $10,000 to $20,000 per year. Any medical expense about that amount would not be insured. Recognizing these gaps in coverage, consumers are increasingly likely to purchase some type of supplemental insurance to cover catastrophic expenses.

Types of Coverage

Supplemental health insurance policies can generally fall into one of six categories:

• Specific illness (cancer policies, for example).
• Mini-med - insurance that defines the maximum that will be paid for any specific medical expense.
• Emergency - accident insurance and emergency room policies fall into this category
• International - these cover additional risks that surface when travelling outside the U.S. Examples include medical records or transcription into English, conversion of billing and currency to U.S. dollars for payment. These policies may also include non-medical insurance like lost luggage protection.
• Umbrella or catastrophic - also known as "limit" policies. For example, insurance with a large deductible like $5000 can be used to supplement an employer's mini-med plan. Conversely, a basic medical insurance plan can be
• Basic coverage - provides "first dollar" coverage for a high-deductible employer plan. These usually have no deductibles or co-payment and tend to appeal to people with lower income and little savings.

Cost

While these policies range from $20 per year to over $400 per month, the most common supplemental insurance policies have a premium of $40 to $75 per month. Because these policies can define the benefits that will be provided, it is possible to find a supplemental policy in almost any price range. In this type of insurance, it is easy to see the direct relationship between the premium price and the benefit amounts paid.

Features

The most important feature may be how the supplemental insurance integrates with any other insurance. These polices state that benefits are paid in addition to any other insurance or, alternately, coordinate benefits with other insurance to avoid duplicating coverage. The second type of coverage is less expensive but obviously there are uses for each type of plan. Policies that pay in addition to other insurance can be used to pay deductibles and co-pays or used to replace income lost during an illness or period of medical treatment.

The second most important feature is universal availability. While there are some exceptions, most supplemental policies are available to all applicants regardless of medical history. The only obstacle to eligibility for these plans are some state insurance laws that restrict or delay the introduction of these policies.

Another important feature is the treatment of pre-existing medical conditions. Coverage under a supplemental policy is typically more liberal under a supplemental insurance policy than an individual major medical plan.

Supplemental Insurance can be obtained through a group employee benefit plan or by individual consumers. Some policies offer slightly lower premiums when a group of employees are enrolled and billed together.

Tax Considerations

One of the driving forces for the increased use of supplemental health insurance is favorable tax treatment. Unincorporated businesses and S corporations may be able to classify insurance for employees as a deductible business expense. Benefit payments received from a health insurance company are tax-free. In contrast, payments from businesses made directly to medical providers on behalf of employees are often not deductible by businesses. Individuals cannot deduct medical expenses unless they exceed 7.5% of income (The threshold limit increases to 10% in 2013 so even fewer people will qualify).

Special rules apply to Health Savings Accounts. Tax laws specify that some types of low deductible major medical and other health insurance cannot be combined with HSAs but most types of supplemental insurance is allowed. This topic is covered in more detail at www.healthsavingsaccount-hsa.com. It is possible to lower the financial risk associated with high deductible insurance by using both a supplemental insurance policy and a Health Savings Account in combination. We anticipate the continued growth of employer-provided high deductible insurance with individually purchased supplemental coverage.

Products

The most popular supplemental insurance policy since 2008 was Core Health Insurance from United States Fire Insurance Company. A number of other insurance companies will introduce new policies over the next year and we expect the next generation of policies will be even more attractive to consumers. We expect, for example, that the recently enhanced ValueMed insurance will gain popularity in coming year.

American Families Life Assurance Company (AFLAC) is the nation's largest marketer of supplemental insurance, working through a network of agents who primarily sell the coverage as a voluntary employee benefit plan. The company announced that it will withdraw its individual limited benefit plans in response to reform laws but group-type coverage will continue to be available.

The least expensive supplemental insurance plans are Value Emergency Room, and Value 24 Hour Accident, all under at less than $40 per month. These provide lower benefits that may help cover deductibles and co-pays of other insurance but should not be used as the only type of insurance coverage.