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INSURANCE INSIGHTS

What are the pros and cons of stop-loss insurance? Do I need it?

Stop-loss insurance is coverage for businesses that self-fund, or self-insure, their own employee health benefit plans. Rather than paying premiums to an insurance company to cover health care expenses for employees, self-insured employers pay their employees' health claims and contract with companies to administer the health plan for each employee. Most large companies are self-insured.

KEY TAKEAWAYS
  • Businesses that fund their own health benefit plans use stop-loss insurance to prevent health insurance claims from exceeding a certain amount.
  • Specific stop-loss insurance covers the cost of extreme losses referrable to an individual member of the plan.
  • Aggregate stop-loss coverage protects businesses when total claims of the entire group exceed a certain level.

By self-funding their own plans, businesses take on the risk of their employees' health care expenses. Stop-loss insurance is a layer of protection in case health insurance claims exceed a certain threshold.

There are two types of stop-loss insurance--specific and aggregate coverage. Specific stop-loss insurance covers extreme losses for an individual person covered by the plan. Say, for instance, an employee has a catastrophic illness or injury and racks up extraordinary medical bills. The specific stop-loss coverage would kick in when the bills exceeded a certain level defined in the policy.

Aggregate stop-loss coverage protects employers when total claims by the entire group exceed a certain level, such as 125 percent of the cost of projected claims.

Although as a consumer, you never deal directly with stop-loss insurance, the coverage provides an indirect benefit by enabling employers to take on risk safely and provide health benefits to their employees and dependents.