Do You Really Need Supplemental Insurance?

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Having insurance protects you from tragic events that could otherwise devastate your finances. In that light, adding a supplemental insurance policy that fills in the gaps in your standard insurance would look like simply getting more of a good thing.

Unfortunately, that's not always the case. A recent case involving one insurance company's questionable practices emphasizes how important it is to do your homework before you buy a supplemental policy.

Earlier this week, the Massachusetts Attorney General's office announced that it had arrived at a $5.25 million settlement against the Life Insurance Company of North America. The settlement stemmed from allegations that the insurance company had used deceptive tactics to market its cancer and surgical insurance policies to World War II veterans, including exaggerating the policies' benefits, misrepresenting their coverage limits, and making false claims about premium rates.

Although the parties had previously come to a settlement last year, the insurance company's failure to meet all the conditions of the original settlement led the AG to pursue further damages.

How Supplemental Insurance Works

Supplemental insurance provides extra coverage where traditional policies fall short. Especially with health insurance, typical policies provide broad-based coverage that covers a wide range of different conditions and needs. But those often policies don't provide coverage for specific illnesses or medical procedures that might be of particular interest to you, or if they do, policy limits might mean they won't cover all of your potential costs. Moreover, while traditional health insurance covers direct costs like hospital bills and doctors' visits, it usually doesn't cover lost wages or other financial impacts that can result from an illness or injury.

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Supplemental insurance can fill those gaps, with policies available for specific types of care including cancer treatment, vision, and dental coverage, and other policies providing cash in cases of accidents, hospitalization, or disability.

But the Massachusetts case shows how difficult it can be for ordinary consumers to understand supplemental insurance.

First, it can be difficult for ordinary consumers to understand exactly who stands behind a supplemental insurance policy. Part of the confusion stems from the fact that certain types of supplemental policies -- Medicare Supplement Insurance or Medigap policies -- are specifically designed to fill coverage gaps in Medicare. The Medicare program acknowledges these supplemental policies even though they're offered solely by private insurance companies. Yet some insurance companies blur the line even further, using names that make the policies sound as if they're provided directly by the government. In the Massachusetts case, the AG's Office alleged that marketing materials to prospective customers made the policies look as if they were offered under a government program aimed at helping veterans.

How to Evaluate Supplemental Insurance

In deciding whether supplemental insurance coverage is appropriate for you, keep the following things in mind:

  • Make sure you know what benefits the policy will provide and under what conditions. Often, general descriptions of policy benefits won't include details like waiting periods for coverage to kick in, restrictions on the exact types of illnesses or injuries that qualify, or requirements you'll have to fulfill in order to claim your benefits. The worst possible result is counting on coverage that your policy doesn't actually provide.

  • Ask about how much rates can change in the future. As you get older, the risk of certain types of illnesses rises and most policies will therefore force you to pay more to maintain your coverage in future years. Too often, people can afford to pay for coverage early on but then end up having to drop their coverage at exactly the time when their risk of actually needing that coverage reaches its higher point.

  • Understand what coverage you already have. Many employers offer disability insurance as a standard employee benefit, with group rates that are often much more attractive than you'd get from an individual policy on your own. Moreover, you might be able to boost the amount of coverage you get at a cheaper cost than you'd pay to buy a separate supplemental policy. Also be sure to consider government programs like Social Security Disability Insurance, which can provide disability benefits to those who meet minimum work requirements.

Most importantly, understand that the specialized coverage that supplemental insurance offers tends to attract those who are most prone to the conditions they cover, which results in insurance companies having to charge higher premiums than if a broader spectrum of the population bought those policies. Given the very limited scope of many supplemental policies, you'll need to weigh carefully whether the chances of needing that coverage truly justify the cost involved.

Never buy supplemental insurance until you are completely comfortable in your knowledge of what it covers, how much it will cost, and whether your personal risk is high enough to justify the expense. Otherwise, an aggressive sales pitch may leave you with a product that turns out to be of little or no use to you.