Self-Funded Insurance Policies
- Instead of buying group health insurance from a traditional insurance company, some businesses choose to create their own insurance plans. This is known as self-funding your insurance and it can be very effective when done correctly. With this type of plan, the company sets aside a certain amount of money to pay claims. When an employee needs to file a claim, the company takes the money out of the fund for the insurance and uses it to pay for the medical expense.
- When a company self-insures, it could lead to potentially catastrophic losses. If too many employees filed claims at once, it could deplete all of the money that the employer had saved up. Because of this risk, employers can purchase stop-loss insurance. This is a type of insurance that will kick in once the employer has paid out a maximum amount of money. For example, once an employer has paid $50,000 in claims, the stop-loss insurance kicks in and pays the rest.
- Using this type of insurance model can be very beneficial for some companies. One of the main benefits of self-insurance is that you can completely customize the plan to fit your needs. You do not have to take a policy that is offered to you by the insurance company. Another benefit is that you can cut down on administrative costs. Instead of having to pay the insurance company to handle everything and take a profit, you can just take care of the plan and save money.
- One of the major disadvantages of using this type of plan is that it can be distracting. When you have to devote a portion of your company to handling insurance, you are potentially dabbling in something that has nothing to do with your business. This takes time and resources away from your main priority as a company. Another problem is that you may not actually save that much money if you do not handle the plan correctly.
