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Catastrophic coverage first: provide protection, then convenience, when considering health-care options.

Increasing numbers of employers are finding that high deductible health plans can provide significant premium savings over traditional health plans, and many employers automatically deposit this savings into Health Savings Accounts for their employees to pay for first dollar health care.

Although this is a good use for the savings, financial planners should ask questions before recommending this approach to clients. By probing deeper, they can help each employer develop a more comprehensive benefit plan, strengthen their relationship with the client, and enhance their commission income.

Employee benefits come in two broad categories: catastrophic protection and first dollar benefits. Employees commonly overstate their need for the latter and understate their need for the former. After all, how many employers offer dental insurance but not long-term disability coverage? This is not surprising, as most employees plan to go to the dentist in any given year, but do not plan on being unable to work for an extended period of time.

Employers should strive to make sure that catastrophic needs are addressed first. Employees need protection from premature loss of life or loss of income due to disability. Most employees can afford to pay for a doctors' visit or a prescription drug, even if they are hesitant to admit it. Very few employees are prepared to deal with the loss of income for 12 months or the premature death of a primary wage earner.

Employers should address catastrophic exposures with a strong foundation of medical insurance, long-term disability insurance, and life insurance. Only when these needs are met should other forms of protection be included.

Medical insurance should be comprehensive in nature, covering a broad range of accepted treatments and providing the covered member a reasonable choice of providers. Disability income insurance should provide benefits to normal retirement age, replacing an adequate amount of income to maintain an employee's lifestyle. Life insurance should provide enough protection to cover reasonable funeral and estate costs as well as family financial security.

Employers have to balance the need for catastrophic protection with their budget constraints. As a result, they may need to share costs with employees. Voluntary and individual benefits are an excellent way to fill this gap. There are a wide variety of voluntary and individual products available to meet catastrophic needs, the most important being voluntary life and voluntary long-term disability.

An employer's role goes beyond merely offering voluntary coverages. The employer also needs to educate workers and to encourage them to enroll. It is important that this be an ongoing process as employees' needs change over time. New employees need to be engaged in this process as well.

After addressing catastrophic needs, employers can turn their attention to first dollar benefits. Funding an HSA, dental coverage or short-term disability should certainly be considered. Employees should be engaged in the decision-making process. The employer likely will find that employees value a broad range of first dollar benefits. This lends itself well to allowing employees to create a program that best meets their individual needs through voluntary and individual coverages.

The employer has to take local circumstances into account when designing the program. If dental is offered by the majority of local employers, it likely will need to be offered to attract and retain employees.

Helping employees select the appropriate first dollar benefits involves employers in two primary ways. First, they can elect to fund certain first dollar benefits either in full or in part, increasing their attractiveness to employees. Second, they can provide both a forum and tools to learn more about the options and how they impact the employee.

It benefits both employer and employee to implement pre-tax approaches to funding these first dollar benefits. Employers should be encouraged to implement a Section 125 plan (also known as a cafeteria plan or salary reduction plan) to obtain these tax savings.

Focusing on catastrophic protection benefits the employee, the employer and the financial planner. The employee gains peace of mind, while the employer directs limited resources to where they can make the most difference. By helping the employer, the planner strengthens his or her relationship with the client.

The planner also enhances commissions. HSAs offer little, or no, compensation for the producer, but life and disability products offer attractive income while providing valuable protection.

Jerry L. Ripperger, a Best's Review columnist, is director of Consumer Health at Principal Financial Group, Des Moines, Iowa. He can be reached at
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Title Annotation:Catastrophic Protection; First Dollar Benefits
Comment:Catastrophic coverage first: provide protection, then convenience, when considering health-care options.(Catastrophic Protection)(First Dollar Benefits)
Author:Ripperger, Jerry L.
Publication:Best's Review
Geographic Code:1U4IA
Date:May 1, 2005
Previous Article:Sink or swim: the future of small health plans is in question, but many are taking steps to ensure their long-term sustainability in the market.
Next Article:Detecting a pattern: insurers can use predictive modeling to segment risks, reveal new market potential and maximize profits.

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