Should You Buy Supplemental Health Insurance?

A great idea for some but not for others

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Supplemental health insurance can help to cover out-of-pocket costs and other expenses that your regular health insurance plan won't pay.

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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 does not 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 to cover lost wages, transportation related to your health condition, or used to pay for food, medication, and other unexpected expenses you have due to an illness or injury.

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 (for example, prescription drugs aren't covered unless you have Medicare Part D, and services like custodial long-term care, dental care, and basic vision care are not covered by Original Medicare). But even for the medical services that Original Medicare does cover, there's some cost-sharing involved: A deductible for inpatient care (plus daily coinsurance if your hospital stay lasts more than 60 days), and a deductible plus coinsurance for outpatient 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 20% coinsurance for all of it.

If you have Original Medicare but lack Medigap coverage, there is 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 a person would have with Original Medicare plus a Medigap plan.

With the exception of some medical expenses for care received outside the US (which is normally not covered by Original Medicare other than some very limited exceptions), 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. Instead, 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.

If you are enrolled in Original Medicare (Parts A and B) and have a Medigap policy, Medicare will first pay its share of your covered health care 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 an Original Medicare beneficiary's out-of-pocket costs can get, which is why so many Original Medicare beneficiaries maintain supplemental coverage.

Medigap Plans C and F include coverage for the Part B deductible, as well as the rest of the out-of-pocket costs that Original Medicare beneficiaries would otherwise have to pay. But starting in 2020, Plans C and F are no longer be available for newly-eligible Medicare beneficiaries to purchase. This is a result of legislation enacted in 2015; lawmakers wanted to try to limit overutilization of Medicare services by ensuring that enrollees would have to at least pay the Part B deductible if they receive outpatient care, without having all of their costs covered in full by the combination of Medicare and Medigap (as of 2020, the Part B deductible is $198 for the year; it 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 is much lower than the Medicare Part A deductible).

While there are Medigap plans that cover all out-of-pocket expenses for all covered services, those plans can no longer be purchased by people who weren't already eligible for Medicare prior to the start of 2020. For people who become eligible for Medicare on or after January 1, 2020, none of the available Medigap plans cover the Part B deductible ($198 in 2020). But people who already have Medigap plans that cover the Part B deductible—i.e., Plan F or Plan C—are allowed to keep them, and people who were already eligible for Medicare prior to 2020 are still allowed to apply for those plans.

Common Types of Supplemental Insurance

Aside from Medigap policies, several other types of supplemental health insurance are widely sold in the U.S. These supplemental policies may be available as a voluntary benefit from your employer or you can purchase one directly from an insurance company.

Dental and Vision Coverage: Dental and vision care are generally not included in health plans for adults in the U.S. The Affordable Care Act requires individual and small group plans to provide coverage for pediatric dental and vision services, although this can be accomplished by incorporating the coverage into a medical plan or offering it as a separate plan.

But there is no requirement that adult dental and vision care be offered or provided. Original Medicare does not cover routine dental and vision (many Medicare Advantage plans do, however), and most commercial health insurance plans do not either. Instead, people can choose to 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. For people who don't have an option for employer-sponsored dental and vision coverage, there are plans available for purchase in the private insurance market.

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 that you're not caught unawares in a tough situation, expecting a payout from your critical illness plan and then not receiving one.

Accidental Death Policies and Supplemental Accident Plans: There are two kinds of accident policies, including accidental death and dismemberment insurance (AD&D) and accident health insurance. They are 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 are the named beneficiary of someone who died in an accident. These policies may also pay smaller amounts if the person did not die but lost a limb, eyesight, or suffered permanent paralysis. AD&D insurance does not pay for any deaths related to illness, suicide, or natural causes.

Accident medical insurance, also known as an accident hospital indemnity policy, may pay for medical costs resulting from an accident not covered by your regular health insurance. Some of these policies may also pay for extended home care services, as well as 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. And having an accident supplement in addition to an HSA-qualified high-deductible health plan does not interfere with the person's 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 are 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 dollar amount for various outpatient services, as well as inpatient care. But again, these plans are not adequate to serve as stand-alone health coverage, as they can leave the insured with unlimited out-of-pocket costs in the event of a serious medical condition.

Deciding If You Need 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 are 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, or by enrolling in a Medicare Advantage plan (most Medicare Advantage plans include Part D coverage). In most cases, nothing else is needed, unless you're enrolled in Original Medicare and want to purchase a stand-alone dental/vision plan (i.e., a plan not associated with Medicare).

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

  • If you or a family member gets into an accident or develops a serious illness, 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, along with the additional expenses that could go along with being sick and/or being out of work for an extended period of time?
  • How likely is it that you or a member of your family will be in a serious accident or develop a major illness?
  • Does the extra cost of the supplemental insurance policy make sense over time? In other words, how much are you going to pay in premiums over the course of a year or a decade? How likely are you to use the plan? (the more specific its limitations are, the less likely you'll be to use it) Would it make more sense to stash that money in a separate account and use it to cover out-of-pocket medical costs? 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, it is important to understand the limitations and benefits of such insurance.

For example, your supplemental policy may not cover all the expenses you expected; it may impose waiting periods before payments start; or 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 do not, 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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