Should You Buy Supplemental Health Insurance?

A great idea for some but not for others

Supplemental insurance is extra or additional insurance that you can purchase to help you pay for services and out-of-pocket expenses that your regular insurance doesn't cover.

Some supplemental insurance plans will pay for the out-of-pocket cost-sharing that goes along with your health insurance plan (ie, deductibles, copayments, and coinsurance), or for medical services that your health plan doesn't cover at all, such as dental and vision costs.

Other supplemental plans may provide you with a cash benefit paid out over a period of time or given to you in one lump sum. The cash can be used for:

  • Covering lost wages
  • Transportation related to your health condition
  • Food, medication, and other unexpected expenses you have due to an illness or injury
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Medigap: Medicare Supplemental Insurance

One of the most common types of supplemental insurance is Medigap, which is sold by private insurance companies to people enrolled in Original Medicare. (Medigap plans cannot be paired with Medicare Advantage plans).

Original Medicare, which includes Part A hospital insurance and Part B medical insurance, covers many, but not all, health-related services and medical supplies. Things not covered by Original Medicare include:

However, even for the medical services that Original Medicare does cover, you still have some cost-sharing expenses:

  • A deductible for inpatient care
  • Daily coinsurance, if you're in the hospital for more than 60 days
  • A deductible plus coinsurance for outpatient and physician care

You can purchase a Medigap policy to cover some or all of those deductible and coinsurance costs that you'd otherwise have to pay yourself under Original Medicare.

These can add up to a lot, especially if you need extensive outpatient services (such as kidney dialysis) and have to pay Medicare Part B's unlimited 20% coinsurance for all of it.

If you have Original Medicare but lack Medigap coverage, there's no limit to how high your out-of-pocket costs can be. By contrast, Medicare Advantage plans cap out-of-pocket expenses without the need for supplemental insurance, but tend to have higher out-of-pocket costs than you'd have with Original Medicare plus a Medigap plan. Medicare Advantage plans also tend to have more limited provider networks.

Medigap plans don't cover costs for services that Original Medicare doesn't cover at all, such as custodial long-term care or dental services. The plans are designed to pay the out-of-pocket costs that you'd otherwise have to pay for services that are covered by Original Medicare.

One exception: Some Medigap plans pay 80% of the cost of emergency care you may need while traveling outside the U.S., which is only covered by Original Medicare in some limited cases.

If you're enrolled in Original Medicare (Parts A and B) and have a Medigap policy:

  • Medicare will first pay its share of your covered healthcare costs.
  • Your Medigap policy will then cover the rest, up to the limits of the plan.

Without Medigap (or other supplemental coverage, such as an employer-sponsored plan or Medicaid), there is no cap on how high your Original Medicare out-of-pocket costs can get, which is why most Original Medicare beneficiaries maintain some type of supplemental coverage.

Medigap Plans are named with letters that range from A to N (not all letters are included; there are ten standardized plans, and two of them also have high-deductible versions). The benefits vary depending on the letter, but the plans are standardized, which means that a Plan G from one insurer will provide the same benefits as Plan G offered by another insurer.

Medigap plans C and F include coverage for the Part B deductible plus the rest of the out-of-pocket costs that Original Medicare beneficiaries would otherwise have to pay. But Medigap plans C and F are only available to beneficiaries who became eligible for Medicare prior to January 1, 2020.

That restriction is due to legislation that was enacted in 2015. It was enacted by lawmakers who wanted to limit overutilization of Medicare services by ensuring that beneficiaries would have to at least pay the Part B deductible if they receive outpatient care. (The Part B deductible as of 2021 is $203 for the year, up from $198 in 2020.)

The Medicare Part B deductible tends to increase from one year to the next but remains much lower than out-of-pocket costs under many other types of health insurance. And it's much lower than the Medicare Part A deductible that applies if a person needs inpatient care (the Part A deductible is $1,484 in 2021).

If you became eligible for Medicare on or after January 1, 2020, none of the available Medigap plans cover the Part B deductible. If you already have one of those plans, you can keep it. If you were Medicare-eligible before the January 2020 cut-off, you can still apply for them.

Common Types of Supplemental Insurance

Although Medigap is a common form of supplemental medical coverage, it's only available to Americans who have Original Medicare coverage.

There are many other types of supplemental health coverage that are available to people who have other types of health insurance. Your employer may offer them as a voluntary benefit, or you can purchase one directly from an insurance company.

Adult Dental and Vision Coverage

Dental and vision care are generally not included in health plans for adults in the U.S.

Original Medicare doesn't cover routine dental and vision (but many Medicare Advantage plans do) and most commercial health insurance plans don't, either.

To get those covered, you can enroll in a separate plan that covers dental and/or vision care. Employers often offer this as a supplemental coverage option for employees, with the employer paying a portion of the premiums.

If you don't have the option of employer-sponsored dental and vision coverage, you can purchase coverage through the private insurance market.

Children's Dental and Vision Coverage

The Affordable Care Act requires individual and small group plans to provide coverage for pediatric dental and vision services. Insurance companies may incorporate dental and vision into a medical plan or offer them as a separate plan.

Critical Illness Insurance

Critical illness insurance, also known as disease-specific insurance, is meant to ease the financial burden of a serious illness such as cancer.

These policies may provide a lump-sum cash benefit to help you pay for additional costs that are related to your illness but not covered by your regular health plan or disability coverage. The money can then be used to pay for various expenses, including:

  • Deductibles
  • Out-of-network specialists
  • Travel and lodging when treatment is far from home
  • Experimental treatments
  • Childcare and household assistance
  • Normal living expenses, such as car payments, utility bills, and groceries

Critical illness plans generally have a very specific list of diagnoses that will trigger a payout. If you get seriously sick with something that isn't specifically listed on your policy, the plan won't pay you anything—even if you incur substantial out-of-pocket costs as a result of the illness.

It's important to understand exactly how the policy works before you purchase it so you're not caught unaware in a tough situation, expecting a payout from your critical illness plan and then not receiving one.

Accidental Death and Supplemental Accident Plans

Two kinds of accident policies are available, including accidental death and dismemberment insurance (AD&D) and supplemental accident insurance. They're often combined and sold together. The benefits vary from state to state due to local insurance regulations.

An AD&D policy will pay you a lump-sum cash benefit if you're the named beneficiary of someone who died in an accident. These policies may pay smaller amounts if the person didn't die but lost a limb, went blind, or became permanently paralyzed.

AD&D insurance does not pay for any deaths related to illness, suicide, or natural causes.

Accident medical insurance, also known as an accident indemnity policy or a supplemental accident policy, may pay for medical costs resulting from an accident or injury. Some of these policies may also pay for extended home care services and travel and lodging expenses for family members.

Some accident supplements will just reimburse you up to a pre-determined flat amount ($5,000 is common) if you have medical claims resulting from an accident.

Accident supplement policies are popular with healthy people who have high-deductible insurance plans, defraying upfront premium costs while providing a "backup plan" in the unlikely event of a calamity. The money can then be used to pay the health insurance deductible.

Having an accident supplement in addition to an HSA-qualified high-deductible health plan does not interfere with your eligibility to make pre-tax contributions to a health savings account (HSA).

Hospital Indemnity Insurance

Hospital indemnity insurance, also known as hospital confinement insurance, provides a cash benefit if you're confined to a hospital due to an illness or serious injury.

The cash benefit, doled out either in one lump sum or as daily/weekly payments, may not start until after a minimum waiting period.

Similar to other types of supplemental insurance, the hospital indemnity coverage is meant to help you pay for services and needed items not covered by your regular health plan.

There are also fixed indemnity policies that pay up to a specified amount for various outpatient services and inpatient care. Again, these plans are not adequate as stand-alone health coverage, as they can leave you with unlimited out-of-pocket costs in the event of a serious medical condition.

Deciding On Supplemental Coverage

Supplemental health insurance plans are heavily promoted in direct-to-consumer advertising. Many Americans are familiar with the Aflac duck, an advertising symbol that has helped Aflac become the largest provider of supplemental insurance in the United States.

Although many supplemental policies are not overly expensive, duplicate coverage may be unnecessary.

Generally speaking, if you're over 65 and have Medicare, you can get the full coverage you need by:

  • Purchasing a standard Medigap policy plus a Medicare Part D prescription drugs plan and possibly a stand-alone dental/vision plan.
  • By enrolling in a Medicare Advantage plan (most of which include Part D coverage and dental/vision coverage).

If you are under 65 and/or don't have Medicare, your first step is to determine whether you and your family are fully protected with a regular health plan. If you think you need supplemental insurance, ask yourself the following questions:

  • If you (or a family member) become seriously ill or get into an accident, will your current health plan cover the costs of treatment?
  • Do you have a way to cover the out-of-pocket costs that would be incurred under your current health plan on top of being sick and/or out of work for an extended period of time?
  • How likely are you or your family members to be in a serious accident or develop a major illness?
  • Does the extra cost of the supplemental insurance policy make sense over time?

When looking at that final questions, ask yourself:

  • How much you'd pay in premiums over the course of a year or a decade
  • How likely you are to use the plan (the more specific its limitations, the less likely you'll be to use it)
  • Whether it would make more sense to stash that money in a separate account and use it to cover out-of-pocket medical costs. If the plan has a fairly low payout amount that's capped regardless of the cost you'd incur, you might find that it makes more sense to "self-insure" by saving the premiums yourself. But you'd need a backup strategy if you ended up needing to pay extensive medical bills soon after starting to grow your savings.
  • Is your employer subsidizing the cost of the supplemental coverage? If so, enrolling might be a good way to boost your health coverage without having to pay the full cost of the premiums yourself.

There's no one-size-fits-all answer, as it depends on your circumstances and the specific policy you're considering. 

Additionally, before purchasing a supplemental policy, be sure you understand its limitations and benefits. For example, it may not cover all the expenses you expected; it may impose waiting periods before payments start; or it may contain limits based on how much you paid and for how long.

It is important to understand that supplemental insurance is not regulated by the Affordable Care Act. This means that an insurer can deny coverage based on your medical history, impose limits on pre-existing conditions, and cap benefits at fairly low levels.

A Word From Verywell

However great the terms of supplemental health insurance may be, the plans are neither intended to stand alone nor replace your regular health insurance. Supplemental insurance is just that: a supplement.

Before signing on the dotted line, make sure you that fully understand the benefits and limitations of the policy. If you don't, contact your state's department of insurance for a referral to a consumer advocate or helpline.

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Article Sources
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