What Is Supplemental Health Insurance?

Supplemental health insurance is a single piece of the puzzle. It fills in gaps left by comprehensive health insurance. Image © Kemal Ba/Getty Images

What Is Supplemental Health Insurance?

Supplemental health insurance is an add-on insurance policy designed to augment your comprehensive, major-medical health insurance. It helps fill gaps in the financial protection you get from your major-medical health insurance.

Types of supplemental Health Insurance

There are many types of supplemental health insurance, and each type works differently. Some of the most common supplemental health insurance types are:

Disease-Specific Plans

Disease-specific supplemental health insurance plans pay a lump sum after you’ve been diagnosed with a specific disease. For example, cancer insurance will pay out when you’ve been diagnosed with a type of cancer listed in the policy.

Unlike health insurance or Medigap plans, a disease-specific plan pays out a lump-sum cash benefit directly to you, not to your health care provider. You may use it for anything you wish and are not obligated to use it for paying medical bills. Many people use it to help with the costs associated with the illness such as copays, deductibles, and transportation and lodging costs when going to a university or tertiary care treatment center far away. However, if you want to use it to buy a Harley Davidson instead, the choice is yours.

Disease-specific plans are a type of fixed indemnity insurance, meaning the amount of money the insurer will pay out is fixed; it doesn’t vary based on the size of your medical bills. If your policy says you get $20,000 when you’re diagnosed with cancer, you get paid $20,000 for the diagnosis whether your medical bills are $500 or $500,000 (although disease-specific policies typically only pay out for cancer if it's invasive, meaning that the bills would be fairly significant; a basal cell carcinoma removed in an outpatient setting and requires no further treatment is not going to trigger a payout from your critical illness plan).

Critical Illness Insurance

Critical illness insurance is similar to disease-specific plans except that it usually covers several different types of diseases. For example, a supplemental critical illness policy may pay a lump sum benefit if you’re diagnosed with a heart attack, stroke, cancer, end-stage renal disease, or need an organ transplant. The specific diseases covered vary from policy to policy. Premiums for a critical illness policy may be higher than premiums for a similarly sized benefit from a disease-specific policy because the insurer assumes more risk due to the number of diseases the policy will pay out for.

Hospital Indemnity Insurance

Hospital Indemnity Insurance pays a fixed amount to you when you’re hospitalized. Some plans pay a lump sum for a hospitalization whether you’re in the hospital for two days or 20 days. Other plans pay a daily rate for each day you’re hospitalized, for example, $100 per day. In either case, the amount you’re paid is set by your supplemental hospital indemnity insurance policy; it has nothing to do with how much your hospital bill is. You may use the money however you see fit.

Some hospital indemnity plans also include benefits for outpatient surgeries. This may be a lump-sum amount that is somewhat smaller than the lump-sum amount paid for an inpatient hospitalization.

Accident Insurance

Accident insurance reimburses you for out-of-pocket medical costs associated with an accident or injury. In most cases, you’ll be required to show medical bills, receipts, and/or the explanation of benefits from your health insurance to prove your out-of-pocket medical costs.

Accident supplements typically have a fairly low benefit maximum ($5,000 is common), as they're designed to cover your deductible and coinsurance if you're injured and need to seek medical care. But they will generally only reimburse you for the actual amount of costs that you incur, if your costs are lower than the benefit maximum. For example, if you have a $6,000 deductible on your health insurance and you end up cutting yourself and needing stitches that cost $1,500, the accident supplement will only reimburse you $1,500 (less a small deductible, if the accident plan has a deductible), even if the maximum benefit is $5,000.

Accidental Death & Dismemberment

The accidental death part of an AD&D policy pays a lump sum benefit to the person you’ve named as a beneficiary if you’re killed in an accident. There may be some exclusions such as if the accident occurred while doing something illegal.

The death benefit of an AD&D policy differs from life insurance in that the cause of death must be directly related to an accident for the AD&D policy, but a term-life policy will pay a benefit whether the death is due to an accident, cancer, a heart attack, or even something like Ebola. When you have both life insurance and AD&D insurance and you die in an accident, your beneficiary receives payments from both policies.

The dismemberment part of an AD&D policy pays a lump sum benefit to you if an accident leaves you without a limb, part of a limb, or leaves you blind. Reading an AD&D policy is a rather grim task as it lists specific dollar amounts for the loss of one leg, two legs, one foot, two feet, one arm, two arms, one eye, both eyes, and so forth.

The lump-sum paid out by an AD&D policy can be used in any way you (or your beneficiary in the event of your death) choose.

Dental Insurance

Dental Insurance is sometimes considered to be a type of supplemental health insurance. It pays benefits directly to your dentist when you receive covered dental services. Many dental plans are managed care plans and require you to use providers that are in-network with the plan. Others cover out-of-network dental care, but your share of the bill will be higher.

As with comprehensive health insurance, you may have deductibles, copayments, or coinsurance with a dental plan. In addition, many dental plans have maximum yearly benefit limits. For example, a dental policy might state that benefits are limited to $2,000 per year. In that case, the plan stops paying once it has paid $2,000 toward your dental care that year. You’ll be responsible for any dental bills left unpaid after you’ve reached your policy’s maximum annual payout limit.

The Affordable Care Act designated dental coverage for children as an essential health benefit, but dental coverage for adults is not mandated. Some health insurance companies now embed pediatric dental coverage in their policies, while others direct members to purchase separate pediatric dental coverage. 

Vision Insurance

Vision insurance supplements the vision benefits of a comprehensive health plan. Most major-medical health insurance plans pay for care related to the diagnosis and treatment of diseases of the eye such as glaucoma or macular degeneration, and for injuries to the eye. However, most health insurance plans won’t pay for routine vision correction.

Supplementary vision insurance picks up the slack here and helps pay for glasses, contact lenses, and the refraction exams needed to prescribe them correctly. Some vision insurance plans also help pay for vision correction surgery like LASIK.

As with dental coverage, pediatric vision care is an essential health benefit under the Affordable Care Act, but adult vision coverage is not.


Medigap is a group of supplemental health plans designed specifically for those who have United States Medicare Part A and Medicare Part B insurance. People who don’t have U.S. Medicare aren’t eligible to buy a Medigap plan.

Medigap plans help Medicare beneficiaries pay for things like deductibles, copays, coinsurance, and emergency care while traveling abroad. Other than the foreign travel emergency care benefit, Medigap benefits are tied to using your Medicare insurance. Medigap pays some of the cost-sharing amounts due after Medicare has paid its share of your covered medical expenses. For example, Medigap may pay your deductible when you’re hospitalized.

Caveat Emptor With Supplemental Health Insurance

Supplemental health insurance is not a substitute for comprehensive health insurance like Obamacare, a group health plan you get through your employer, Medicare, Medicaid, or Tricare. It’s meant as an add-on to a regular health plan, not as a substitute for one.

Supplemental health insurance does not cover all of the essential health benefits, and it's not considered minimum essential coverage, so it won’t satisfy the Affordable Care Act’s requirement to have health insurance and will not help you avoid the tax penalty for being uninsured (note that although the GOP tax bill enacted in late 2017 does eventually repeal the individual mandate penalty, that doesn't happen until 2019; people who are uninsured in 2018 will still have to pay a penalty when they file their taxes in early 2019, unless they qualify for an exemption).

Some types of health insurance may impact the tax benefits you enjoy from having a Health Savings Account coupled with a High Deductible Health Plan. If you have an HSA, check with your tax planner before buying any other type of health insurance to make sure you understand the impact this might have on your HSA. You can read  more about this in IRS Publication 969.

Supplemental health plans aren’t regulated as strictly as comprehensive health insurance plans are. The consumer protections included with a supplemental health insurance policy may vary depending on whether you’re purchasing the policy through your job, or as an individual. Many supplemental health insurance plans don’t have the same consumer protections you’re used to in comprehensive health insurance.

For example, some types of supplemental health insurance exclude pre-existing conditions or have waiting periods before coverage for pre-existing conditions kicks in. There are generally annual or lifetime maximum payouts, and they tend to be far lower than the full amount necessary to treat various illnesses or injuries (this is why these plans are supposed to be supplemental to other health insurance, rather than a replacement for other health insurance). The coverage may not be guaranteed renewable, meaning that you might not be able to re-enroll year after year. Some types of policies may not be guaranteed issue, meaning the insurer can refuse to insure you if it thinks you pose too great a risk.

Lastly, insurers are allowed to make a larger profit on supplemental health insurance than they are on comprehensive health insurance. Many of the comprehensive health plans sold in the United States must spend 80-85% of the money they collect in premiums on paying for health care or quality assurance activities, leaving just 15-20% for administrative costs, advertising, and profits. Supplemental plans aren't regulated in that way. They may spend a much smaller portion of the money taken in as premiums toward paying for benefits, leaving a larger portion for agent commissions, advertising, administrative overhead, and profits.

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