Supplemental insurance, also known as “add-on” or “Voluntary insurance,” is extra coverage that protects you and your loved ones during life’s uncertain moments — from illness to injury and even death. It’s designed to supplement traditional Medical insurance, not replace it.
But do you really need such a plan if you already have savings or a Health savings account (HSA)? It turns out, many people find Supplemental insurance is a valuable component of their financial plan. Read on to learn more.
What Is Supplemental Insurance?
Medical insurance is designed to pay for the costs of medical care. Supplemental insurance products insure against a variety of other risks and are designed to be purchased in addition to medical, not to replace it.
Supplemental insurance works a little differently than a regular Health plan, and that’s a good thing. You still pay a monthly premium (although it’s typically much less than your Health insurance premium), and Supplemental plans still provide payments via claims.
Supplemental insurance is less complicated — with the exception of Dental or Vision plans (which work similarly to medical insurance), you won’t have to worry about things like coinsurance, deductibles, copays or networks.
Supplemental Insurance Categories
In general, Supplemental insurance falls into a few different categories, and how you get paid can depend on the category:
- Disability insurance usually pays out a portion of your paycheck for a specified period of time.
- Life insurance pays a death benefit, which can be a fixed amount or a multiple of earnings.
- Supplemental health plans, such as Accident or Critical illness insurance, usually pay a fixed amount or lump-sum payment for each covered event or condition.
The Supplemental health benefits (Accident, Critical Illness and Hospital Indemnity) are independent and do not coordinate with any other health coverage, which means that the benefits would generally be paid in addition to any other benefit such as Health insurance.
The claim money goes to you — or your loved ones, in the case of life insurance — to spend how you need to. You can use it to pay off doctor’s bills, get groceries or even make rent for the month.
Learn the Lingo: What Are My Medical Savings Options?
You have options when it comes to paying for unexpected medical bills; here are three that we’ll compare in this article.
A plan provides extra protection on top of traditional Health insurance. Depending on the plan, it provides payments for claims based on designated events, like hospitalization after a car accident or the inability to work due to a disability.
Personal Savings Account
This is your nest egg for emergency savings. Experts recommend saving about three to six months of living expenses. The problem is, a single high medical bill could drain the account — and once it’s empty, it can take many months or more to replenish.
Health Savings Account (HSA)
Allows you to deposit pre-tax dollars through regular payroll deductions or separate contributions. The money can be used for qualified healthcare expenses as needed. However, participation is limited to people with a High-deductible Health insurance plan.
Is Supplemental Insurance Worth It?
Like everything in life, each option — whether it’s Supplemental insurance, personal savings or an HSA — has some pros and cons.
Supplemental insurance, for example, gives you a certain amount of coverage for your premium as designated in your policy. You know ahead of time what your policy includes, which gives you a little more peace of mind. But it comes at the cost of monthly premiums.
With both HSA and savings, you are limited to whatever amount you have saved to date. The point of an HSA is to save on a pre-tax basis. The downside may be that it’s used for routine medical expenses.
The bigger downside with a savings account is that it may be used for all kinds of other things (to fix your car) and then it won’t be available for medical bills.
Even with those variables, you might find that a mix of two or all three work best. But before determining which path to choose, ask yourself these questions:
Do I Trust Myself to Save Enough Each Month?
We all have aspirational plans for our finances, but sometimes reality gets in the way. And that’s what makes a savings account particularly tricky if you’re using it for your medical emergency fund. You’ve got to be diligent about saving — even when other expenses tempt you to spend that money elsewhere.
HSAs and Supplemental insurance don’t have that downside because they can be automatically deducted from your paycheck. Out of sight, out of mind. You never see the money, which means your take-home pay is all yours. This makes budgeting more straightforward and your savings more protected from routine expenses.
Can I Trust Myself to Plan?
Then again, it’s not just about trusting yourself to save. It’s also about knowing how much to save in the first place. When you have to budget and plan for taxes, premiums and savings deposits, things can get complicated quickly.
Those financial headaches can add up when you consider all the work that goes into managing a personal savings account. You have to track the money going in and out, make sure you’re meeting savings goals and use the funds wisely. (This is why many people choose to have separate savings accounts. They might have one for medical expenses, one for emergencies and one for long-term goals like home purchases or vacations.)
With both HSAs and Supplemental insurance, not only do automatic payroll deductions keep your goals on track, but they also mean that you don’t get tempted to spend the money on non-medical expenses. HSAs can only be used on qualified medical expenses, while Supplemental insurance provides the benefits listed in your policy.
How Much Do I Value Immediate Protection?
Some Supplemental insurance plans have a waiting period of a month or more, which would mean you might not have access to benefits right away. But then again, once you pass that waiting period, you’re covered, up to the benefit amount, for the events, services or conditions described in the policy. This can be beneficial in many ways.
Say, for example, you burn yourself while cooking or get hospitalized with an infection. If you had a Supplemental health plan, such as Accident insurance, you’ll get the full amount that is covered — even if you’ve only paid a few months of those premiums. If you also have Short- or Long-term Disability insurance, a portion of your income may be protected, too.
Although HSA money is paid with pre-tax dollars, HSAs don’t offer that kind of immediate protection because it’s wholly reliant on how much is in your account when you need it.
Same for personal savings accounts. If you have a crazy year of curveballs that deplete your savings account, you may not have the funds if something happens. Many people don’t.
About 40% of Americans couldn’t cover a $400 medical expense if needed. That can make people think twice about getting care, especially when money is tight. Earlier this year, a Bankrate.com survey found that roughly 33% of families skipped getting healthcare because of finances.
The whirlwind of 2020 illustrated a new reality for many people. It’s no longer hard to imagine losing your job, catching a virus and enduring a catastrophic weather event in a single year. With those circumstances, it wouldn’t take long for your savings account to run dry, or for a job loss to impact the availability of your Supplemental coverage.
Supplemental Insurance in Real Life: Doing the Math
Let’s look at an example. Imagine you’re a healthy, active teacher in your 30s. One weekend in January, you’re taking down the holiday lights and lose your footing on the ladder. You fall to the ground and land on your arm. It’s broken.
Your Health insurance covers a portion of your medical care, but it leaves you with out-of-pocket bills that you now have to pay on top of new expenses that accompany your rehabilitation, like additional childcare and grocery delivery.
So what’s the advantage of a medical savings account, HSA or Supplemental insurance to cover those bills? Let’s first explore the upfront costs for each scenario.
Let’s Say, for Example: Monthly Upfront Costs Per
- Accident Insurance Premium: $10/month
- Savings Deposit: $10/month
- HSA Contribution: $10/month
How Much Does Medical Care Cost?
The average cost of staying in the hospital is around $2,517, and you still have to consider other fees, such as procedures, specialists, rehabilitation, durable medical equipment (DME) and other expenses. Check fairhealthconsumer.org/medical to see estimates for common procedures.
If you were to use:
Your savings account funds to pay for your bills…
What if your out of pocket costs exceed the money in your savings account? You’d have to use all of your savings to pay for your medical care, and then you may still need to borrow money from friends or family, use a credit card or sign up for a payment plan with the hospital.
Your HSA to pay for your bills…
It’s only January, and you used all of your HSA funds last year on prescriptions, so you only have $10 in your account. Similar to the above example, you’re likely going to be taking on debt.
Your Supplemental insurance benefit…
You’ve paid premiums on your Accident insurance for two years now and (luckily) never needed it. If covered under the terms of your policy, your Accident plan could pay you for the hospital visit plus for your injury and potentially put extra money in your pocket for those other non-medical expenses. The check is made out to you, which means you can allocate the money on whatever you want and need.
No debt. No worries. And best of all, you can recover on your own time.
Plan for the Unthinkable and Get Peace of Mind
Nobody wants to think of the disasters that could lie ahead, but it’s prudent to make a plan, just in case. Even if you don’t think you’ll need Supplemental insurance, it can pay off if the unthinkable were to happen. Not only would you get the peace of mind and financial protection, but you’d also be able to focus on what matters most: getting better.
So this open enrollment, consider what you’re buying with those low monthly premiums. Pay a little now, and save yourself a lot of headaches later.
This informational material shall not be considered financial advice. The Hartford assumes no responsibility for any financial, investment, or tax-related decisions. Those seeking resolution of specific financial, legal, tax, or business issues, questions, or concerns regarding this topic should consult their own financial, investment, tax, legal, or other business consultants, advisors, or other professionals.