What is stop loss insurance?


Quick Answer

Stop-loss insurance is insurance that employers who self-insure their employees purchase to be able to handle extraordinary catastrophic claims. The employer pays for claims up to a predetermined amount, but if specific or aggregate health claims get too high, the stop-loss insurance company steps in and pays the balance.

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Full Answer

Small businesses typically insure their employees by purchasing health coverage from insurance companies, as they cannot afford to assume the risk of having to pay for catastrophic surgery or illnesses. However, larger companies with workforces that are mainly young and healthy can theoretically save a significant amount of money on health premiums by self-funding their employees' insurance. This also gives them autonomy in deciding which services are covered. Stop-loss insurance precludes the possibility of financial disaster by providing high deductible insurance to cover major medical expenditures.

Self-funding is a viable alternative for businesses with more than 100 employees because it enables them to save money on standard insurance premiums and have more leeway concerning coverage options. However, if the company has an older workforce, it potentially faces considerable expenditures for health care before stop-loss insurance kicks in and pays the balance. Additionally, because in self-funding programs business owners control health care funds, they might be tempted to dip into the health fund savings if the business is struggling.

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