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What is stop-loss insurance?

Some employers want to provide their employees with health insurance without having to pay for an expensive group insurance plan. One way to do this is by self-insuring. Typically, this means that the employer establishes a fund that it uses to pay the medical expenses of its workers and their families. Or, the employer pays the medical expenses as they arise out of current cash flow. This can be a cost-effective alternative to traditional insurance, but it can also be risky. If an unexpectedly large number of employees get seriously ill, their medical bills could wipe out the entire medical fund or require payments beyond the employer's ability to pay. If medical bills are unpaid, the employer will be exposed to lawsuits from other employees with unpaid medical bills of their own. In some cases, this could bankrupt a company.

If you're a business owner who has chosen to self-insure, stop-loss health insurance can help guard against this risk. Stop-loss insurance pays your employees' medical bills after you have paid a certain predetermined amount. Some policies are designed to protect you against high claims by any one employee or family member. Once you have paid the specified amount (e.g., $10,000), the insurance pays for the rest of the individual's medical expenses, up to the policy's coverage limits. Other policies protect you against an unexpectedly large amount in total claims. In this case, the coverage kicks in once you've paid a certain amount toward all of your employees' medical bills (again, coverage limits apply).

Stop-loss insurance can be a great source of financial protection, but you'll have to weigh the cost against the potential benefits to determine if this type of insurance makes sense for your business. If your risk exposure is relatively low (e.g., your employees are young and healthy), you may choose to self-insure without using stop-loss insurance for added protection. Or, after considering the estimated claims you are likely to pay and the premium for the stop-loss coverage, you may find that you're actually better off purchasing a group insurance plan to cover your employees and their families.

If you decide that stop-loss insurance is appropriate for your business, you'll have to find an insurer who offers this specialized product--not all do. And be sure to compare cost and coverage. Policies often vary widely, so it's important to choose one that meets both your needs and your budget.