5 Things to Know Before Buying Supplemental Health Insurance

Supplemental Insurance Lacks the Consumer Protections of Major-Medical

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In the United States, supplemental health insurance isn’t as heavily regulated as major-medical health insurance is. It doesn’t carry all of the consumer protections you've come to expect from health insurance.

For example, some types of supplemental health insurance may exclude pre-existing conditions or have long waiting periods before coverage for pre-existing conditions kicks in. There may be a cap on the amount a supplemental health insurance policy will pay each year or over a lifetime. Thanks to the Affordable Care Act, major-medical policies can’t exclude pre-existing conditions and can’t place lifetime or annual limits on benefits.

Additionally, some supplemental policies might not be guaranteed renewable, meaning that you might not be able to re-enroll year after year. Some policies may not be guaranteed issue, meaning the insurer can refuse to insure you if it thinks you pose too great a risk. This isn't true of comprehensive health insurance. It's guaranteed renewable and guaranteed issue.

The Profit Margin on Supplemental Health Insurance Is High

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Insurers want you to buy supplemental health insurance because it’s more profitable for them than comprehensive health insurance is.

Why are supplemental policies more profitable? First, they offer less coverage with more exclusions and limitations than comprehensive policies. This means there are fewer circumstances that will result in a pay-out.

Second, federal regulations require that 80-85% of the money comprehensive health plans take in as premiums be spent paying for members’ health care or quality assurance activities. That only leaves 15-20% for overhead costs and profits. If a comprehensive health plan spends less than 80-85% of premiums on member benefits and quality assurance, it must refund the difference back to its members.

However, supplemental insurance doesn’t have to follow those regulations. Because supplemental insurers aren’t forced to spend 80-85% of premiums paying claims, they can have much higher profit margins.

There’s nothing inherently wrong with and insurer making a big profit as long as you’re aware. After all, you’re the one funding those high profits when you pay your premiums.

Supplemental Insurance Shouldn’t Stand Alone

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Supplemental health insurance is meant as an add-on to comprehensive health insurance; it shouldn't be your only health insurance. Think of supplemental health insurance as the icing on a cake. It adds an extra cushion of financial protection to a major-medical health insurance policy, but it doesn’t provide the wide-based safety-net of comprehensive health insurance.

Why not? Supplemental health insurance doesn’t cover all of the essential health benefits like an Obamacare plan does. It doesn’t provide the comprehensive coverage that employer-sponsored group health plans and Medicare provide.

An Example

Let’s say you bought two different types of supplemental health insurance, but you didn’t have a comprehensive major-medical health plan. You bought a critical illness policy that pays you $75,000 cash if you’re diagnosed with cancer, a stroke, a heart attack, or require an organ transplant. You also bought a hospital indemnity policy that pays you $200 for every day you’re admitted to the hospital. You think you're pretty well covered.

Now let’s say you’re diagnosed with rheumatoid arthritis. In the first six months, you rack up $12,000 in medical bills, but you're never admitted to the hospital.

Your two supplemental health insurance policies won’t pay a dime. Since you weren’t hospitalized, your hospital indemnity policy doesn’t kick in. Since rheumatoid arthritis wasn’t one of the diseases covered by your critical illness policy, it won’t pay either. You’d be stuck paying all $12,000 yourself.

However, if you had comprehensive health insurance, it would pay a good portion of those bills. Even the stingiest comprehensive health plan would pick up roughly half of those expenses, and most health plans would pick up significantly more.

With comprehensive health insurance, you’d have to pay your deductible, copayments for the doctor’s visits, and either a copayment or coinsurance for the drug. If you reach your health plan’s out-of-pocket maximum, then your health plan pays 100% of your covered medical costs for the remainder of the year.

If you can’t afford both comprehensive, major-medical health insurance and supplemental health insurance, spend your money buying the major-medical rather than the supplemental. It’s the more important of the two.

Supplemental Insurance Won’t Avoid the Penalty for Being Uninsured

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Residents of the United States are required to have health insurance or pay a tax penalty. Comprehensive health insurance provided through your job, COBRA, Tricare, Medicare and Medicaid qualify. Obamacare policies bought through Affordable Care Act health insurance exchanges also qualify.

Supplemental health insurance policies do not qualify. If the only health insurance you have is supplemental health insurance, you’ll face a tax penalty for being uninsured.

This penalty can be from hundreds to thousands of dollars depending on your income. Although it’s possible to get an exemption from the penalty in some circumstances, the best way to avoid the penalty is to have comprehensive health insurance.

How Much Is the Penalty for Not Having Health Insurance?
Does It Cost Less to Buy Health Insurance or Pay the Tax Penalty?

Don't Count on Getting Help Paying for Supplemental Health Insurance

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There are several ways to get help paying for comprehensive health insurance.

  • Employers routinely subsidize the health insurance of their employees by paying a large portion of the monthly premiums.  
  • Most with incomes below 400% of federal poverty level can get a subsidy through Affordable Care Act health insurance exchanges.
  • Those meeting requirements can get Medicaid, a comprehensive health insurance provided by the government as a social welfare benefit.
  • Although most Medicare Part B recipients pay premiums for their Part B coverage, the coverage is heavily subsidized from the nation’s general revenues.

However, there are no government subsidies for supplemental health insurance. You can't even take it as a deduction on your income taxes. The only help paying for supplemental health insurance happens when an employer contributes toward premium payments with you as part of a generous employee benefits plan. Otherwise, the buck stops with you.

How To Pick the Best Supplemental Health Insurance

Learn more about subsidies for comprehensive health insurance:

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