Supplemental Insurance: What Is It, and When Do You Need it?
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Supplemental health insurance provides an extra level of coverage by helping consumers meet out-of-pocket expenses and other costs not covered by their regular insurance.
Supplemental plans serve as secondary payers, filling in coverage gaps and complementing regular insurance. This mitigates, and in some cases eliminates, costs associated with copays, deductibles and other expenses depending on the extent of coverage of the supplemental insurance.
What is supplemental insurance?
Supplemental insurance is any policy that you have in addition to your main health insurance coverage.
Supplemental policies may improve the medical coverage you already have. They may cover a different set of services, such as dental care. They may also function in different ways, such as paying out a set price if you need treatment, rather than paying a percentage of the medical bill.
Plans can protect against the financial burdens caused by catastrophic illnesses and accidents. For example, let’s say that you end up in the hospital for three days. With a typical health insurance plan, your portion of the bill could be a few thousand dollars. The supplemental plan could help pay for your costs, potentially reducing your portion of the bill down to a few hundred dollars.
There are many types of supplemental plans, some of them specific to certain diseases and conditions. For example, consumers can purchase supplemental cancer insurance to help pay for cancer-related screenings and treatments. Women can buy supplemental insurance for pregnancy to defray costs of prenatal care, labor and the birth of a baby. (These policies must be purchased before conception.)
Medicare supplemental plans, also called Medigap, are a separate category of supplemental plans that provide additional coverage beyond Medicare. With Medicare Part A (hospitalization) and Medicare Part B (medical care), you'd typically pay 20% of your health care costs. Adding a supplement plan would reduce or eliminate your medical costs.
These supplemental plans are only available to beneficiaries enrolled in traditional Medicare. Plans are labeled A through N, the letters denoting the extent of coverage as well as the costs of each plan.
Cost of supplemental insurance
Supplemental policies are less expensive than regular insurance because they provide supplemental coverage, not comprehensive coverage.
However, the cost of supplemental plans varies dramatically, some costing less than $10 a month in premiums and others costing well over $500 a month. It all depends on the policy and a host of other factors, including age, health status, gender, where you live and whether you smoke.
Some of the plans charge consistent premiums through the years while others raise premiums on an annual basis. With nearly all of the policies, age is a determining factor in driving costs — the older you are, the more the policy costs.
When determining the value of the plan, remember to take all of the costs into consideration. Like regular insurance policies, supplemental plans can have deductibles, copays and coinsurance, which adds to their overall costs.
Why should you buy supplemental plans?
Supplemental policies serve a dual purpose of limiting how much you pay for health care while also helping to protect your finances.
Regular insurance plans, even robust plans, carry deductibles, premiums, copays and other costs that can quickly escalate, easily adding up to thousands in uncovered bills. People frequently buy supplemental policies as added protection, relying on the policies to provide an extra level of assistance in the event of illnesses or accidents or to help with regular health care costs.
Supplemental insurance, sometimes called secondary insurance, have become even more important in an era of rising health care costs, declining health care benefits and the growing prevalence of high deductible health plans (HDHPs). Because of these trends, consumers may be less protected against medical costs, and a supplemental plan can help reduce financial risk.
Plans can also be tailored to cover entire families at an additional cost, thus adding a level of protection and security for families. And even though supplemental insurance is an added monthly expense, the plans can more than pay for themselves if you suffer from a serious illness or condition.
Limitations and drawbacks of supplemental insurance
Supplemental insurance policies are not required to adhere to standards established by the Affordable Care Act (ACA). For example, the plans can deny coverage based on health status and can refuse to cover preexisting conditions. The plans can also cap benefits at predetermined levels.
Before buying a plan, it is also important to understand what the policy covers and what it does not cover. A coverage exclusion could mean that you don't get the benefits of a policy in certain situations.
Types of supplemental insurance
Below are descriptions of some of the most popular supplemental plans and what to consider when shopping for coverage.
Supplemental insurance | Who it’s best for |
|---|---|
| Helps pay for medical bills | |
| Fixed indemnity | Those with high-deductible health plans. |
| Hospital insurance | Those with ongoing health conditions. |
| Accident insurance | Those who have a high risk of injury such as athletes. |
| Critical illness insurance | Those who are older or who have a high-risk of specified illnesses. |
| Long-term care insurance | Those who want to be prepared for the high costs of aging. |
| To prepare for death or disability | |
| Supplemental life insurance | Those who want extra financial protection for family members. |
| Accidental death insurance | Those who have high-risk jobs. |
| Disability insurance | Those who want to protect against sudden income loss. |
| Provides add-on benefits | |
| Vision insurance | Most people who want an annual eye exam and discounted lenses. |
| Dental insurance | Most people who want regular cleanings and discounted dental care. |
| Orthodontic insurance | Those who expect to need braces. |
Fixed indemnity
This type of supplemental insurance provides a fixed amount, called an indemnity, to help pay for a specific illness or injury. With this type of plan, you are able to use the benefits any way you want to help cover costs.
For example, the plans may pay $100 for an ambulance ride to the hospital or may contribute $5,000 towards an $80,000 heart bypass operation primarily covered by your major insurance carrier.
By themselves, fixed indemnity plans, like other supplemental plans, are not adequate to cover major health care costs. But they are useful as add-ons, providing extra money to help defray costs. The plans could pay $150 a day for a stay in the hospital — not enough to pay for one day in the hospital, but enough to help with some expenses.
- Bottom line: These plans are useful for consumers with high-deductible health plans and plans that carry high copays and deductibles, such as catastrophic tier plans. They are also a good option for consumers with chronic health conditions who need help meeting health care costs.
- Costs: Fixed indemnity plans are relatively inexpensive, some of the plans costing as little as $25 a month.
Hospital insurance
This type of supplemental insurance, also known as hospital indemnity insurance, provides benefits when you are admitted to a hospital for a sickness or medical condition. It often pays out a set amount to help cover costs. Payments are made either daily or weekly or are paid out in one lump sum.
- Bottom line: These policies are good investments for consumers with ongoing health issues that may require hospitalization. They are also good policies for people with family histories of cancer, heart disease and other serious ailments.
- Costs: Costs vary depending on the plan and amount of coverage. A 60-year-old male living in Northern Virginia can buy a supplemental hospital plan for about $94 a month, which pays out $900 a day for a total of 35 days in the hospital. That same male can buy a less expensive policy, paying $40 a month in premiums, but that plan would only pay $100 daily in the hospital for 35 days.
Example of how hospital insurance works
If you end up staying in a hospital for three days, your hospital bill could easily amount to $30,000.
Your regular insurance policy may have a deductible of $2,000, requiring you to first meet that $2,000 before your insurance policy kicks in. The plan may then charge 20% in coinsurance after the deductible is met. Twenty percent of $30,000 is $6,000, meaning your bill for the three-day hospital stay will amount to $6,000. (This does not include the $2,000 deductible.)
But if you have a supplemental plan that pays $900 for each day in the hospital, the supplemental insurance policy will pay out $2,700 for the three-day hospital stay. This would reduce your bill from $6,000 to $3,300.
Most plans pay out directly to you, so you can also use the money to cover your insurance deductible.
Accident insurance
This type of insurance helps pay for medical and other costs resulting from an accident. It typically covers emergency-room care, hospital stays, medical exams and other costs associated with accidents that are not covered by your major insurance carrier.
Like fixed indemnity plans, accident insurance pays you directly, usually in one lump sum, making it possible to apply the money to other costs that could result from an accident such as lodging or transportation. Accident insurance usually covers qualifying injuries such as broken and sprained limbs, burns, lacerations and paralysis, among other accidental injuries.
- Bottom line: Accident insurance is a good investment for adults and children who play sports and engage in high-risk activities that could lead to injuries. The policies are also a good investment for firefighters, police officers and others employed in high-risk professions.
- Costs: Young and healthy individuals can purchase accident insurance for as little as $6 to $20 a month depending on risk factors and lifestyle. With some insurers, 60-year-old individuals can purchase an accident insurance policy for $33 a month that covers up to $15,000 in annual costs with a $100 deductible.
Critical illness insurance
These plans help pay the costs associated with serious illnesses such as cancer and heart disease. The plans, also known as disease-specific insurance, pay a lump sum for diagnoses specifically listed in the policies.
A qualifying diagnosis — one covered by the plan — prompts a payout of a lump sum that can pay for a variety of costs and services directly and indirectly related to the illness. This can include deductibles and copays as well as other expenses such as experimental treatments, child care, household assistance and lodging if your treatment is far from home.
These plans will only pay for diseases and afflictions listed in their policies. If the condition is not listed, you are unlikely to receive payment.
- Bottom line: These plans are good options for older individuals who are more likely to suffer from conditions such as heart disease, stroke and cancer.
- Costs: A 60-year-old could pay $210 a month for a policy providing $50,000 in coverage while someone in their 40s could pay $54 to $65 a month for the same $50,000 policy.
Long-term care insurance
Long-term care insurance helps to protect you from costs resulting from long-term, debilitating illnesses and conditions such as Parkinson’s and Alzheimer’s diseases.
Regular health insurance does not provide adequate coverage for long-term care. The Medicaid and Medicare programs are also inadequate in terms of long-term care coverage. As a result, if you don’t have a long-term policy, you are likely to end up paying for it yourself.
Most long-term care policies provide reimbursement for care provided in the following venues: your home, a nursing home, an assisted living facility or an adult day care center.
With most long-term care policies, coverage will kick in if you are unable to do at least two of the six activities of daily living, which include bathing, caring for incontinence, dressing, eating, getting on and off the toilet, or getting in and out of a bed or chair.
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Bottom line: Seven out of 10 people will need some type of long-term care at some point in their life. But most people will not have to rely on long-term care policies until they are in their 80s.
As a result, most people should not buy a long-term policy until they are in their 50s or 60s. If you buy a policy before then, you are likely to pay premiums on a policy for decades before you actually need the policy. But if you wait longer than your 65th birthday to buy a long-term policy, you will likely pay substantially more than you would have paid if you had bought a policy in your 50s or early 60s.
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Costs: A long-term care insurance policy worth $100,000 could cost $89 for a single 50-year-old female and $106 per month for a married couple, both of whom are 50. That policy may be capped at $100,000, meaning it will only pay out $100,000 total.
Another policy could cost a single 60-year-old man $261 a month in premiums. But that policy would pay out much more when the man turns 85 if the policyholder was able to spend extra to take out a rider to tie policy increases to yearly inflation rates.
Supplemental life insurance
This supplemental policy augments an existing life insurance policy, adding an extra layer of coverage and protecting you and your family against financial burdens.
For many people, standard life insurance policies are not enough, failing to provide adequate compensation for their families in the event of death and even failing in some cases to provide enough to cover funeral expenses.
Supplemental life insurance policies typically provide $25,000 to $500,000 in coverage, but some policies go up to $1 million. These policies have higher coverage limits than standard or regular life insurance because you as the policyholder are paying the premiums, not your employer.
These types of supplemental policies can be purchased from private insurers or from your place of employment as a rider, or add-on, to your regular life insurance policy.
- Bottom line: Before buying a policy, it is a good idea to ask two pertinent questions: One, how much of a financial burden would your death cause your loved ones? And two, is your current life insurance policy enough to cover these costs?
- Costs: Premiums for supplemental life insurance policies vary depending on age, health status and other factors. A 35-year-old may be able to purchase a $350,000 supplemental life insurance policy for $60 a month in premiums. But a 70-year-old purchasing that same policy will pay more than $500 a month in many cases.
Accidental death and dismemberment insurance (AD&D)
This type of insurance pays out if you die in an accident or you suffer dismemberment as the result of an accident, losing a hand, foot or other body part.
AD&D often falls under the category of life insurance, serving to augment life insurance policies. It is sometimes used as a replacement for life insurance. But AD&D is a poor substitute for life insurance because it only pays out if you are injured or killed in a covered accident. It does not cover most causes of death. Life insurance, by contrast, covers most causes of death.
AD&D typically pays out for injuries and death caused by the following:
- Car or airplane accident
- Death caused by murder
- An accident on the job
AD&D does not cover deaths resulting from natural causes such as a heart attack or stroke. It also doesn’t cover deaths caused by suicide, drug use or other high-risk behaviors such as skydiving and car racing.
- Bottom line: AD&D policies are best suited for people in high-risk jobs such as police officers and firefighters.
- Cost: An AD&D policy can be added to an existing life insurance plan for a nominal cost, perhaps as little as $6 a month for $100,000 in coverage and $30 a month for $500,000 in coverage.
Disability Insurance (short term and long term)
This type of insurance pays a portion of your income if you are unable to work because of a serious injury or illness. With disability insurance, benefits are paid directly to you.
These policies protect against a sudden loss of income. This makes the policies an attractive option for both families and individuals who have concerns about what would happen if they lose their main sources of income.
The major difference between short-term and long-term insurance is the period of time payments last. Short-term insurance usually covers a portion of your income, usually for three to six months and sometimes up to a year. Long-term disability insurance lasts much longer, covering a portion of your income for five to 15 years or more.
Short-term disability insurance | Long-term disability insurance | |
|---|---|---|
| Duration | Payments usually last three to six months; maximum coverage is one year. | Payments can last up to 15 years or longer. |
| Coverage | Usually covers 60% to 70% of income. | Usually covers 40% to 60% of income. |
| Cost | Averages 1% to 3% of your income. | Averages 1% to 3% of your income. |
| When do payments start? | Usually start two weeks after a physician verifies you are disabled. | Usually six months after a physician verifies you are disabled. |
- Bottom line: A family's primary earner and people who work in high-risk professions should consider getting disability insurance. It is probably better to get long-term disability insurance if you can find a policy that covers 60% to 70% of your income because long-term disability lasts longer than short-term disability. Many employers employing people in high-risk professions will offer both long-term and short-term insurance and will provide help in paying for at least a portion of the premiums.
- Costs: The costs of both short-term and long-term disability policies are comparable, comprising about 1% to 3% of your annual salary. In other words, the more you make, the more expensive your policy. Short-term disability insurance is slightly more expensive because the plans pay out faster and usually cover a greater portion of your salary.
Vision insurance
Vision policies help to pay for eye exams, glasses, contact lenses and with some policies, corrective eye surgery like Lasik.
Many plans cover routine eye exams without charging deductibles or copays. An eye exam can detect eye diseases or conditions such as glaucoma, diabetes and even cancer long before these afflictions become apparent, potentially saving both lives and money.
- Bottom line: Supplemental vision plans are relatively inexpensive, making them a good buy for consumers who lack vision coverage or need more help purchasing glasses and contact lenses. Supplemental vision insurance also makes sense for people who need corrective surgery, though not all plans will help to pay for corrective surgery.
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Costs: Individuals can expect to pay between $12 and $15 a month in premiums for supplemental vision insurance, while families are likely to pay $36 a month in premiums. This does not include copays and deductibles, which adds to the costs of the plans.
A typical plan, for example, may charge $10 copays for each trip to the eye doctor and $25 for prescription lenses. That same plan may also provide an allowance or stipend of $100 for frames and a $115 allowance for contact lenses.
Dental insurance
Dental insurance plans cover routine dental exams, X-rays, fillings and other procedures. Plans can usually be purchased through an employer. Consumers will also buy stand-alone dental policies if they cannot obtain the plans through work.
Access to regular dental checkups can catch current and emerging conditions, ultimately saving money in the long run. It is also important to remember that original Medicare does not cover dental services, leaving many seniors without coverage.
- Bottom line: Like vision insurance, supplemental dental insurance is relatively inexpensive and a wise investment if you lack dental insurance or if your dental insurance is not comprehensive enough to cover the needs of you and your family.
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Costs: Individuals and families can expect to pay anywhere from $12 to $60 a month for dental coverage, depending on the plan. One popular dental plan, for example, charges both individuals and families $21.99 a month in premiums. It also imposes a $50 deductible for the policyholder and a $150 deductible for each family member added to the plan. It covers up to three additional family members, four people altogether.
Many of the plans charge $40 for adult cleanings and $20 for child cleanings and less for dental exams, but more for fillings and other procedures. With some of the dental plans, there is a three-month waiting period for fillings and other procedures. Some of the plans require policyholders to commit to the plan for 12 months upfront.
Orthodontic insurance
In some cases, consumers realize they need orthodontic insurance because either they or their children need braces. They will then add orthodontic insurance onto their dental plans, usually buying it from a private vendor.
Braces typically cost about $5,000, and orthodontic insurance typically covers 50% of that amount, reducing the cost of the braces to $2,500. Many of the plans also have lifetime benefits of $3,000 to $4,000.
Frequently asked questions
What does supplemental insurance mean?
Supplemental insurance is an add-on to your regular insurance that provides an extra level of coverage, helping you to meet out-of-pocket costs and other expenses not covered by your regular insurance.
Is supplemental insurance worth it?
Supplemental insurance is usually worth it because most insurance policies do not cover all of the costs caused by an illness or an accident, creating a need for supplemental insurance to fill in the gaps.
Who should buy supplemental life insurance?
A supplemental plan is best for anyone who believes their current life insurance policy would not provide enough for their loved ones in case of their death. Many of the supplemental life insurance policies can be added as additions or riders onto their standard life insurance policies at a nominal, monthly cost while adding thousands in benefits.
Can you claim supplemental health insurance on taxes?
Yes. Supplemental health insurance premiums can be entered as a medical expense on your income taxes if you are paying out of pocket for those premiums. If you are under 65, the medical expense deduction has to exceed 10% of your adjusted gross income, AGI, to have an impact on your returns. If you are over 65, that amount has to exceed 7.5% of your AGI to impact your returns.
Where can you buy supplemental insurance plans?
Consumers can buy supplemental policies directly from private insurers, such as from Aflac or Allstate, or through their employers to add onto their regular insurance plans as riders — if their employers offer supplemental plans. It is important to remember that supplemental plans augment and strengthen existing plans