CORRECTED-YOUR MONEY-Supplementary insurance fills new gaps

By Lisa Zamosky

NEW YORK, Aug 2 (Reuters) - Dustin Boersma, 25, wanted a health insurance plan that wouldn't break the bank. The Los Angeles-based freelance web developer found a policy for just $70 a month, but it came with a $4,500 deductible.

To hedge his bet, he spends an extra $19 per month to supplement his health plan with an accident insurance policy that will pay him cash if he's ever injured.

"The big thing I'm worried about is if I get in a huge car accident and don't have the ability to continue making money. I might be financially crippled," Boersma says. "I'm still taking a financial risk."

A convergence of trends in insurance costs is driving up the number of people who are signing up for supplemental insurance - overall sales rose 11 percent between 2011 and 2012, with critical illness sales jumping by 23 percent and accident plans by 21 percent, according to industry analyst, LIMRA.

One big reason for that increase? The 13.5 million-plus people now enrolled in a high-deductible health plan paired with a health savings account (HSA). The number of people using them rose 18.4 percent since 2011, according to America's Health Insurance Plans' annual census report.

High deductible health plans require policyholders to spend a minimum of $1,200 for individual coverage and $2,400 for a family before insurance starts to pay.

Financial incentives built into the Affordable Care Act are also contributing to the trend, says Michael Thompson, principal with PricewaterhouseCoopers' Health and Welfare Practice. A 40 percent excise tax scheduled to take effect in 2018 on high-cost or "Cadillac" health plans, for example, is encouraging employers to design health benefits that stay below the taxable value of $10,200 for individual coverage.

"Years ago, health coverage was robust enough that people could fund extra costs that came with being sick," says Bob Patience, vice president of voluntary benefits for Prudential Financial Inc. "But as health coverage becomes less comprehensive and people pay for more of their medical bills, they are less able to cover all of their other costs."

CASH PAYOUTS

Costs for accident plans, which pay policyholders set cash benefits for a list of covered injuries and services, vary quite a bit, says Tom Morey, a vice president with AFLAC. Typical monthly premiums range from $20 to $35 for family coverage. Policyholders could receive $250 for each day of hospitalization, and $500-$2,000 for surgery required because of an accident. A serious burn could yield a lump sum payout of $20,000.

Critical illness plans offer a set cash benefit that commonly ranges from $5,000 to $50,000, with most plans averaging $10,000 to $20,000 of coverage at roughly $30 a month for a family. Claims are triggered by a diagnosis such as invasive cancer, heart attack or major organ failure. "If you get cancer, you get $10,000 and you can use the money for anything you want," Patience says.

AFLAC and Unum are the largest sellers of accident and critical illness insurance, with AFLAC dominating the market with 60 percent of accident and 28 percent of critical illness plan sales. Other major sellers include American Family Life, Prudential Financial Inc, Assurant, MetLife and Guardian.

BUYER BEWARE

One of the greatest concerns is that consumers - particularly those who buy insurance on their own rather than getting it through work - often fail to understand that critical illness and accident plans are intended to supplement, not take the place of major medical insurance that pays a portion of medical procedures, doctors' visits, equipment and hospital stays.

Here are five suggestions to getting the best plan for your dollars:

1. Be wary of bundled offers.

A number of states have taken action against sellers who bundle supplemental insurance policies and sell them claiming they can take the place of major medical insurance plans at a cheaper price.

"Products with supplemental policies, when sold properly, I'm not concerned about. But when they are bundled with other benefits and are sold in a way to induce consumers to think they are comprehensive, that's a problem," says Mila Kofman, research professor at Georgetown University's Health Policy Institute.

"The fact is they are never a replacement for real health insurance," she says.

2. Make sure you need the policy.

If you have a typical HMO or PPO health insurance plan and disability benefits, experts say supplemental products may be overkill. "I don't know that I would recommend a critical illness policy for someone with a very comprehensive health insurance plan," says Kristen Stoll, consumer specialist with eHealthInsurance.com.

3. Don't overspend.

Consumers paying an annual premium for their supplemental insurance policies that amount to more than a couple of hours' wages are overspending, Morey says.

4. Consider your odds.

Critical illness insurance is especially valuable for people with a family history of cancer or other serious medical issues, and an inexpensive way to gain peace of mind, Stoll says.

But using these plans to bolster financial security is a bit of a gamble given that it's impossible to predict if you'll actually need them. "It's only by chance that the thing that causes catastrophic illness [or an accident] happens," Thompson says.

5. Weigh other options.

Many high deductible health plans are paired with health savings accounts, which allow people to make tax-free contributions to finance a range of out-of-pocket medical costs. It may make more sense to fund an HSA than buy an additional insurance policy.