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CI, stop-loss and self-insurance: A recipe for budget-friendly benefits

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As health care cost increases show no signs of abating, employers continue to seek new and creative ways to control their benefits costs. Pairing self-insurance, where an employer funds its own medical expenses, with stop-loss coverage is an increasingly popular option to help employers gain more control over these costs.

While self-insurance provides greater control as well as financial and regulatory protection for employers, it does not help employees who may also be faced with increased deductibles and other out-of-pocket costs. Employers should consider extending a modest level of critical illness coverage — perhaps $2,000 to $5,000 — to their employees, so when a catastrophic claim occurs, both the employer and employee are financially covered.

Another important factor that cannot be overlooked is the benefit to you — the financial professional. The critical illness benefit can generate commissions — typically structured as level commissions for the life of the plan — for the benefits broker.

Meeting an employee need

According to the Bureau of Labor Statistics’ 2011 Consumer Expenditure Survey, Americans’ average annual household income was $63,685, with expenditures eating up $49,705 of that income. While some expenses, such as entertainment, can be easily trimmed with some resolve, many expenses are fixed, especially over the short term. In addition, a 2011 National Bureau of Economic Research paper found that nearly half of Americans are “financially fragile,” meaning they could not access $2,000 easily for an unexpected expense. Given these statistics, it is easy to see how a critical illness can put a family on the financial brink.

With this troubling backdrop, employees are facing increased deductibles and other out-of-pocket expenses. These costs are likely to rise as Patient Protection and Affordable Care Act (PPACA) requirements for services — such as experimental therapies and the “essential benefits package,” a set of health care service categories that must be covered by certain plans — are implemented and employers look to fix their expenditures on health insurance. Also, consider that most employers want to provide a well-rounded benefits plan for their employees, and they want that package to be valued.

Unlike more traditional employer-paid offerings, such as life insurance, critical illness insurance — a limited benefit policy designed to supplement medical plans with fixed payments on a covered diagnosis — can benefit employees by providing stop-loss type coverage for employees for infrequent, catastrophic diagnoses. Typical critical illness coverage packages include coverage for such things as heart attack, stroke, paralysis or cancer.

For an employee or family faced with a diagnosis such as this, a lump sum, tax-free (when premiums are paid with post-tax dollars) benefit can provide the cash necessary for them to continue to make mortgage or rent payments, pay for child care, or otherwise pay regular household bills. Or critical illness insurance can cover deductibles, co-pays or coinsurance not covered by a medical plan. This is especially beneficial since disability coverage typically only covers 60 percent, on average, of pre-disability income — and that benefit is taxable.

Many carriers have structured their critical illness offerings so employers can pay for coverage for the employee only and allow the employee to purchase coverage for his or her spouse and/or children. In addition, employer-paid critical illness premiums are typically very competitive because insurers get a better spread of the risk than with purely voluntary coverage offerings.

A case study

Consider a 1,000 life company that is fully insured and moves to self-insurance. According to the Kaiser Family Foundation’s Employer Health Benefits 2012 Survey, the employer will save approximately $150 per employee or $385 per family without accounting for any plan changes they may make as a result of the switch, such as eliminating state-mandated benefits.

Alternately, employers that already self-insure can take cost-saving steps. Changing their specific deductible from $100,000 to $150,000 can generate as much as a savings of $150,000 annually — or $150 per employee annually.

A $5,000 employer-paid critical illness plan would cost as low as $40 for employee-only coverage. This could create an overall savings of $100 per employee for the employer while providing a powerful benefit for the employee population.

For employees, the benefit could help cover a variety of expenses related directly or indirectly to illness or recovery. A 2012 ING U.S. study showed that employees used their critical illness benefits to pay for a variety of expenses. (Respondents could choose more than one answer.)

Co-pays, coinsurance and deductibles not covered by health plan 66%
Help offset lost time from work 58%
Pay for other expenses 68%
Pay for utility or mortgage payments 59%
Pay for expenses not related to accident / critical illness 35%
Home modifications/improvements 13%

While critical illness insurance is not a replacement for major medical insurance, it can be a valued supplement to a well-rounded benefits package. A modest investment can make a significant impact in an employee’s life in the event of a critical illness diagnosis. For the self-insured employer, critical illness insurance can be paired with stop-loss insurance to build a better medical benefits package that helps employers and employees account for the what-ifs of life.