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Supplemental health insurance: What is it & how does it work?

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The U.S. healthcare system is notoriously expensive. So expensive, two out of every three personal bankruptcies in America can be directly attributed to debt caused by medical bills.

This harsh reality makes finding reliable health insurance a necessity for individuals and families alike. But that’s easier said than done, which is why it’s important to understand how different types of supplemental health insurance can help you fill gaps and cover what traditional health plans don’t.

In this guide, we’ll detail everything you need to about supplemental insurance, including:

Let’s dive in.

What is supplemental insurance?

Supplemental health insurance — also known as gap health insurance or supplemental insurance — is an added layer of protection that pays for some of the charges stemming from an accident or illness that you’re responsible for after your health insurance pays the providers of your medical services. These charges can be deductibles and co-payments, or procedures or services that your health insurance may not cover.

In some cases, supplemental insurance goes beyond benefitting you by helping you pay for medical expenses. The lump-sum payment you received from some policies can be used for non-medical costs associated with an injury or illness — things like lost income, childcare costs, monthly bills like mortgage/rent, and travel expenses for experimental procedures.

How does supplemental insurance work?

Supplemental health insurance pays benefits above and beyond the health coverage you carry either through a group or individual policy.

Although people without any type of health insurance can purchase supplemental insurance as their primary source of coverage, it's certainly not ideal. Supplemental health insurance is best used to complement a traditional plan, not replace it.

There are numerous benefits of carrying supplemental insurance coverage. They include:

  • Benefits are payable directly to you, not the provider
  • The money provided can be used to pay for deductibles and coinsurance
  • Benefits paid to you can make up for lost income while you're ill or convalescing
  • You'll have funds to pay for expenses not covered by your primary plan

For many, this insurance provides them with peace of mind, knowing that they'll have extra money coming in if they are faced with major medical or dental expenses.

For example, if you know that your child will need braces in the near future, a supplemental plan covering orthodontia may prove beneficial when that time arrives.

Similarly, if you know that you won't be able to pay your bills if a heart condition incapacitates you, a supplemental disability insurance plan can prove to be valuable coverage for you.

Many people only think of supplemental health insurance when considering this type of coverage, but here are five different types of coverage that you should become familiar with.

Types of supplemental health insurance

There are numerous supplemental health insurance plans on the market provided by top-rated insurance companies.

Thanks to a certain now-famous duck, most people are somewhat familiar with supplemental health insurance. They're aware that benefits are paid directly to the policyholder, but they may not be aware of the different supplemental health insurance types.

Types of supplemental health insurance include:

  • Critical illness insurance
  • Hospital indemnity insurance
  • Cancer insurance
  • Accident insurance

Let's take a closer look at each.

Critical illness insurance

Also known as critical care insurance, this type of plan provides you with payment for covered illnesses. These policies have a very specific list of illnesses that trigger a payout.

Critical illness insurance policies commonly cover conditions like:

  • Heart Attack
  • Coronary artery bypass surgery
  • Angioplasty
  • Stroke
  • Invasive cancer
  • Non-invasive cancer
  • Kidney (renal) failure
  • Major Organ Transplant
  • Advanced Alzheimer’s disease
  • Paralysis
  • Coma

This is not a universal list of covered conditions. When applying for a critical illness plan, always be sure to confirm with the insurance company what is and isn't covered.

Get a free critical illness insurance quote online in seconds.

Hospital indemnity insurance

Hospital indemnity insurance — or hospital confinement insurance — provides you with payment if you’re confined to a hospital due to a severe injury or accident.

Payment can be in a lump sum or a specified amount for various inpatient and outpatient services. For example, a policy may specify that it will pay $350 for a chest x-ray or $250 to have a broken leg set.

Hospital indemnity insurance plans are meant to supplement your regular health insurance plan, not replace it. These plans are not nearly as comprehensive as stand-alone health insurance plans, and they can expose you to unlimited out-of-pocket costs in the event of a serious medical event.

Cancer insurance

Cancer insurance isn’t meant to replace benefits and payments provided by your primary health insurance policy. Rather, it’s intended to be a supplement and help you pay for some of the expenses associated with cancer and cancer treatment, such as:

  • Visits to out-of-network specialists
  • Various tests, treatments, and procedures
  • Child care
  • Dietary assistance
  • Travel, lodging and meals if treatment is far from home

Some health insurers will decline your application for coverage if you currently have cancer or have had it in the past. As with any policy, be sure to read the fine print on any form of cancer insurance before you buy.

Accident insurance

Accident insurance, also called accident expense insurance, pays you or your beneficiaries cash directly if you are injured or killed due to an accident not excluded in your policy.

When you buy an accident insurance or accidental death and dismemberment (AD&D) policy, it’s crucial to know what is and isn’t covered. Things not covered by accident insurance include pre-existing conditions, drug coverage, and injuries suffered while committing a crime.

Coverage is not guaranteed to be issued when you apply, and each insurer will have specific dollar limits on their coverage.

Supplemental life insurance

Employers often, but not always, will provide life insurance coverage to their employees at low or no cost to the employee. These amounts are typically in smaller amounts, such as $25,000, $50,000, or a multiple of an employee's annual salary.

This is a nice benefit, but it's also a benefit you leave behind when you leave the employer. Your need for life insurance won't go away, but your insurance will. This can leave a family unprotected and exposed financially. Supplemental life insurance goes with you if you leave your employer, helping to protect you until you get coverage from a new employer or purchase a policy independently.

While it's nice to have employer-provided life insurance, it's also inadequate to meet many people's life insurance needs. Someone with a wife, children, and a $250,000 mortgage will likely be inadequately covered if they are only protected by the $100,000 of coverage they have through their job. Supplemental life insurance can make a big difference in the lives of surviving family members.

Supplemental disability insurance

Supplemental disability insurance is probably the least talked-about type of coverage, but it's quite possibly the most important. Disability statistics show that at least 51 million people lack disability insurance coverage other than the basic coverage offered through Social Security. Yet, only 48 percent of American adults indicate they have enough savings to cover three months of living expenses.

While exorbitant medical costs can cripple you financially, not being able to make your mortgage payment can put you in much greater peril personally.

Many people live paycheck-to-paycheck. Group disability insurance — which places a cap on benefits at a certain dollar amount no matter how much you earn — simply isn't enough to meet most individuals' monthly income needs.

A supplemental disability insurance policy can make a big difference in your lifestyle and relieve you of tremendous financial strain when you need it most: while you're recovering from a devastating illness or injury. Policies pay you directly and allow you to continue to pay for necessities such as mortgage or rent payments, utilities, car payments, and childcare expenses.

Supplemental dental & vision insurance

Dental and vision care aren’t generally included in employer-sponsored health insurance or individual major medical policies. To get these covered, you need to enroll in a separate plan. Many employers will offer supplemental dental and vision coverage to their employees as an option, with the employer sometimes paying a portion of the premiums.

Many people dread going to the dentist because it can prove to be physically uncomfortable and because many procedures are costly and not adequately covered by traditional dental insurance policies.

According to CareCredit, a leading provider of financing for individuals faced with out-of-pocket dental costs, average orthodontic and dental costs include:

  • Tooth Crown: $500 - $3,000
  • Dental Implants (per tooth): $1,000 - $3,000
  • Teeth Bonding (per tooth): $100 - $1,000
  • Dental Veneers: $500 - $1,300
  • Professional Teeth Whitening: $300 - $1,000
  • Full Mouth Reconstruction: $15,000 - $80,000
  • Braces (metal): $1,000 - $3,000
  • Invisalign (clear braces): $3,000 - $8,000

Most primary dental insurance will only cover a percentage of these costs with a maximum allowable benefit. For example, many dental policies will only pay 50% of the cost of braces, with a lifetime maximum of $1,500 per person. This can leave you with a substantial amount that you would need to pay out-of-pocket if you or your children need braces. Supplemental dental insurance can ease the pain of large dental expenses.

Medicare supplemental insurance

Many people are under the misconception that you have complete, comprehensive coverage once you are covered by Medicare. This isn't the case. In fact, those covered by Medicare Part A and Medicare Part B coverage can face substantial out-of-pocket costs.

Medicare Parts A and B are known as Original Medicare. Medicare Part A covers hospital stays and treatment in a hospital. Medicare Part B primarily covers doctor’s office visits and doesn't cover routine vision or hearing care, routine foot care, cosmetic procedures, or drugs you pick up at a retail pharmacy. Neither plan covers prescription drugs.

For that reason, most people covered by Medicare will buy a supplemental health plan known as Medicare supplement insurance.

Also known as Medigap, Medicare supplement plans don't work like most health insurance plans. They don't actually cover any health benefits. Medicare supplement plans cover the costs you're responsible for with Original Medicare.

These costs can include:

  • Your Medicare deductibles
  • Hospital costs after you run out of Medicare-covered days
  • Skilled nursing facility costs after you run out of Medicare-covered days

Private insurance companies offer these plans and have saved many seniors from financial calamity due to lengthy hospital stays or large outpatient costs.

Like other insurance coverage you have, you pay a monthly premium for your Medicare supplement plan. In return, the plan pays most of your out-of-pocket expenses. For example, when you go to the doctor, you don't have to pay the 20 percent coinsurance required by Medicare; your Medicare supplement plan covers that charge.

How much does supplemental health insurance cost?

There are no set prices for supplemental plans. Prices will vary according to the plan type, as well as from insurer to insurer. For example, medicare supplement plans can cost as little as a few dollars per month to as much as several hundred dollars per month, depending upon how much the benefits are.

At Breeze, we make it easy to apply online for disability insurance (which can supplement group disability coverage) and critical illness insurance (which can supplement traditional health coverage). Both are individual plans that you can apply for online in about 10 minutes.

To see how much either of these plans might cost for you, go ahead and get a disability insurance quote or critical illness insurance quote online.

Who should buy supplemental health insurance?

Is supplemental insurance worth it? The answer depends on a policy’s affordability, how much additional coverage you need, what you wish to be insured for, and your risk factors.

For example, if you have active young children or ski frequently, an accident policy may be helpful if a mishap occurs. Or, if you suspect your kids are going to require orthodontic care in the future, a dental policy might be a good investment.

Your savings account balance is also a significant determinant if you need supplemental health insurance. If you were hospitalized for several weeks or longer, would you have enough money to pay for deductibles, copays, and coinsurance? How about lost wages if you have cancer and can’t work for eight weeks? Do you have money accessible through an HSA or FSA?

If you’re on the fence and can afford an inexpensive supplemental policy, will buying it help you feel more secure? If so, it just might be worth having.

If you have the opportunity through your employer, consider adding supplemental insurance to the list of benefits you receive through working there. If you don't have employer-provided coverage in one of these critical areas discussed above, it may be a wise decision to add some of these plans on your own. Suppemental insurance may not be the most talked-about type of coverage, but it can be precisely what you need when the unexpected happens.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published May 12, 2021
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