How does stop-loss insurance work? Benefits, cost & myths explained.

The short answer

Stop-loss insurance reimburses a self-funded employer when health claims pass a set limit. Specific stop-loss covers one person's claims above a per-person deductible, and aggregate stop-loss covers total plan claims above a group-wide cap. The employer pays claims up to those attachment points, and the carrier reimburses the excess.

Self-funding your company’s health plan puts you in control of your costs, your coverage and your employees’ care. It’s a smart move for employers who want flexibility and long-term savings, especially as healthcare costs continue to climb.

But even the best strategy comes with unpredictability. That’s where stop-loss insurance steps in. Think of it as a financial safety net that protects your business from unexpectedly high claims, without giving up the advantages of self-funding.

What is Stop-Loss Insurance?

Stop-loss insurance (also called excess insurance) is a coverage product that protects self-funded employers from large, unpredictable healthcare claims. You pay most employee claims out of your own funds, and stop-loss insurance covers the overflow when claims exceed a predetermined limit.

It’s important to note: this is not health insurance for employees. Your employees still receive care through the plan you design. Stop-loss is insurance for your company, keeping your financial exposure predictable and manageable. The Department of Labor describes it the same way: stop-loss usually doesn’t guarantee benefits to plan participants and generally isn’t treated as health insurance under state law. It is regulated by state insurance departments.

What Are the Benefits of Stop-Loss Insurance?

Pairing stop-loss insurance with a self-funded health plan unlocks significant advantages:

  • Protects your bottom line: Stop-loss caps your liability, so even in a high-claims year your business won’t be financially blindsided.
  • Supports cash flow planning: You can better forecast healthcare expenses knowing that large claims have a coverage backstop.
  • Preserves plan flexibility: Unlike traditional fully insured plans, self-funded plans let you customize coverage, and stop-loss helps you do that with confidence.
  • Makes self-funding viable for smaller employers: With stop-loss in place, smaller organizations can self-fund responsibly, often through a level-funded plan.

In short, stop-loss insurance lets employers pursue the cost-saving potential of self-funding while maintaining financial security.

What Are the Types of Stop-Loss Insurance?

There are two main types of stop-loss insurance:

1. Specific Stop-Loss

Also known as individual stop-loss, this coverage kicks in when a single person’s covered claims exceed a set threshold, called the specific deductible or specific attachment point. For example, if your specific deductible is $50,000 and an employee has $300,000 in eligible claims, the stop-loss policy covers the $250,000 difference.

Best for: Protecting against high-cost claimants like cancer treatments, NICU stays, or transplants.

2. Aggregate Stop-Loss

Aggregate stop-loss protects your plan from unusually high total claims across your whole group. If your collective claims for the year exceed a set dollar amount, called the aggregate attachment point and usually set as a percentage of expected claims, the policy reimburses the overage.

Best for: Guarding against the risk of an unexpectedly expensive year overall, especially in smaller or newer groups.

Most self-funded employers use both types for well-rounded protection.

FeatureSpecific Stop-LossAggregate Stop-Loss
What it coversHigh-cost claims from an individual memberCumulative claims from your entire group
When it appliesWhen one member’s claims exceed the specific deductibleWhen total claims exceed the aggregate attachment point
Risk protected againstUnexpected catastrophic claimsHigher-than-expected plan-wide costs
Applies toEach individual separatelyAll plan members combined

How Does Stop-Loss Insurance Work?

Here’s a simplified breakdown:

  1. You design a self-funded plan. Your business sets the benefits and pays employee claims as they arise.
  2. You select stop-loss coverage levels. For specific stop-loss, you pick a deductible per person (for example, $40,000). For aggregate stop-loss, the cap is based on expected annual claims plus a buffer.
  3. Claims occur. Routine claims are paid from plan funds by your plan administrator or TPA.
  4. High claims are reimbursed. If a single person exceeds the specific deductible, or the group exceeds the aggregate attachment point, your stop-loss carrier reimburses the excess to the plan.

Stop-loss policies are typically written for 12 months and renew annually. The contract basis decides which claims count, based on when they were incurred and when they were paid.

What is an attachment point, and how low can it go?

The attachment point is the claims amount beyond which the stop-loss carrier starts paying. Specific stop-loss has a per-person attachment point (the specific deductible). Aggregate stop-loss has a group-wide attachment point, calculated from expected claims.

Because stop-loss is regulated under state insurance law, some states limit how low attachment points can go, so that a small employer isn’t effectively buying health insurance under another name. The NAIC Stop Loss Insurance Model Act bars policies with a specific attachment point below $20,000, an aggregate attachment point for groups of 50 or fewer below the greatest of $4,000 per group member, 120 percent of expected claims or $20,000, and an aggregate attachment point for groups of 51 or more below 110 percent of expected claims. States that adopt the model may change those amounts, and many states have no minimum at all, so the rules in the state where your policy is issued are the ones that apply.

What are the stop-loss contract types?

A stop-loss contract is described by two numbers: the months in which a claim must be incurred and the months in which it must be paid to be covered.

ContractWhat it covers
12/12Claims incurred and paid within the 12-month policy period
12/15Claims incurred during the 12-month policy period and paid within 15 months, giving a 3-month run-out
24/12Claims incurred in the 12 months before the policy plus the 12-month policy period, and paid during the policy period, giving a 12-month run-in
PaidClaims paid during the policy period, regardless of when they were incurred, often after the first year with a carrier
  • Run-in covers claims incurred before the policy started but paid during it. It matters most when you move from one stop-loss carrier to another.
  • Run-out covers claims incurred during the policy but paid after it ends.
  • Terminal liability is an option that adds run-out coverage if the plan ends or moves to fully insured coverage, so claims incurred before termination but paid afterward are still protected.

Gaps between an old contract’s run-out and a new contract’s run-in are where reimbursements get lost, so check both before changing carriers.

What is lasering?

Lasering is when a stop-loss carrier sets a higher specific deductible for one person with known high costs, or excludes that person entirely. If your specific deductible is $50,000 but one member is lasered at $250,000, your plan pays that member’s claims up to $250,000 before the policy responds. Lasers can be added at a new placement or at renewal, which is why some employers negotiate a “no new laser” provision or a renewal rate cap before binding the policy.

Is stop-loss the same as an out-of-pocket maximum?

No. These two limits protect different people. An out-of-pocket maximum is the most an employee pays in a plan year for covered in-network care through deductibles, copays and coinsurance. After that, the plan pays 100 percent of covered benefits. Self-funded plans that aren’t grandfathered must follow the ACA limit, which is $10,600 for self-only coverage and $21,200 for family coverage for 2026 plan years, and $12,000 and $24,000 for 2027 plan years.

Stop-loss limits what the employer’s plan pays, not what employees pay. Hitting a stop-loss attachment point doesn’t change anything for the employee. Some older plan documents use “stop-loss” to mean the point where an employee’s coinsurance stops, which is what is now called the out-of-pocket maximum.

How Much Does Stop-Loss Insurance Cost?

There is no standard price. The cost of stop-loss insurance varies by:

  • Group size and demographics
  • Claims history
  • Deductible levels chosen
  • Contract terms (12/12, 12/15, 24/12, etc.)
  • Lasers and other negotiated provisions
  • Market conditions and carrier rates

Specific and aggregate coverage are priced separately, usually as a rate per employee per month. Higher deductibles and longer run-in or run-out periods change the premium, so compare quotes on the same contract basis before comparing price.

How Do You Choose the Right Stop-Loss Coverage?

When selecting a stop-loss policy, consider:

  • Risk tolerance: Higher deductibles lower premiums but increase your exposure.
  • Cash flow: Can your business cover a few high claims before reimbursement?
  • Group stability: Healthier, more stable populations often justify higher thresholds.
  • Broker and TPA experience: Work with partners who understand how to negotiate terms and manage claims effectively.
  • Contract terms: Watch the contract basis (for example, 12/12 vs. 12/15), lasers and terminal liability. These decide which claims are eligible for reimbursement.

Pro tip: The cheapest stop-loss policy isn’t always the best. Focus on value, reimbursement speed and carrier reputation. Ethos Benefits reviews and places stop-loss contracts through its stop-loss service.

Common Myths and Misconceptions

Myth: Stop-loss is only for large companies.

Fact: With the right design, stop-loss also works for smaller groups, often as part of a level-funded plan.

Myth: Stop-loss delays reimbursements.

Fact: Reimbursement timing is set by the contract. Complete documentation and clear terms keep it moving, and many carriers offer advance funding for very large claims.

Myth: Stop-loss replaces your employee health plan.

Fact: Stop-loss protects the employer. Your team still uses the same self-funded benefits.

From the Ethos Benefits team

Transfer is the most expensive mode of risk management, and usually what we see is, the larger the transfer, the larger the commission to the broker.

Chelsea RyckisFounder and President, Ethos BenefitsOn The Business of Benefits, Episode 85LinkedIn

Questions employers ask about this.

What does stop-loss mean in health insurance?

Stop-loss is coverage a self-funded employer buys to cap what its health plan pays in claims. The employer's plan pays employee claims up to a set limit, called the attachment point, and the stop-loss carrier reimburses eligible claims above it. It protects the employer's budget, not individual employees, and it does not change what employees pay for their care.

What is specific stop-loss insurance?

Specific stop-loss, also called individual stop-loss, reimburses a self-funded plan when one person's eligible claims in the policy period pass a per-person deductible, known as the specific attachment point. The employer's plan pays that person's claims up to the deductible, and the carrier pays the rest under the contract's terms. Each covered person is measured separately, and lasers can raise the deductible for one person.

Is stop-loss insurance considered health insurance?

No. The Department of Labor notes that stop-loss insures the employer or the plan against large losses and generally does not pay benefits to employees, so it is generally not treated as health insurance under state law. State insurance departments regulate the stop-loss policy, and the self-funded plan itself still has to meet the federal rules that apply to group health plans.

Is stop-loss insurance the same as reinsurance?

No. Stop-loss is excess-loss coverage that a self-funded employer, or its plan, buys directly to cap its own claims costs. Reinsurance is coverage an insurance company buys to protect itself against losses on policies it has already written. Some vendors use the terms loosely, so check who the policyholder is: under a stop-loss policy, it is the employer or the plan.

Is stop-loss insurance required for a self-funded health plan?

No federal law requires a self-funded employer to buy stop-loss, but most self-funded employers do, because without it one catastrophic claim or a bad year falls entirely on the employer. Level-funded plans build it into the monthly payment. Where a state has adopted minimum attachment points, those rules limit how low the policy's deductibles can be set rather than requiring coverage.

How quickly are stop-loss claims reimbursed?

Timing depends on the contract and on how complete the claim submission is. Specific claims are usually filed once a person passes the deductible, while annual aggregate is usually settled after the policy period and its run-out end. Get the reimbursement terms in writing, and ask whether the carrier offers advance funding for very large claims so the plan does not carry the cash.

Can small businesses use stop-loss insurance?

Yes. Many employers first use stop-loss inside a level-funded plan, which bundles it with administration and a claims fund, as a step toward traditional self-funding as the group grows. Smaller groups carry more risk because one large claim can move the whole year, and some states set minimum attachment points that limit how low a small group's deductibles can go.

Sources

  1. Stop Loss Insurance Model Act (Model, National Association of Insurance Commissioners
  2. Technical Release 2014-01: Guidance on State Regulation of Stop-Loss Insurance, U.S. Department of Labor, Employee Benefits Security Administration
  3. 29 U.S. Code § 1191b, Definitions (group health plan, health insurance coverage), Legal Information Institute, Cornell Law School
  4. Premium Adjustment Percentage, Maximum Annual Limitation on Cost Sharing and Related Parameters for the 2027 Benefit Year, Centers for Medicare & Medicaid Services
  5. Out-of-pocket maximum/limit, HealthCare.gov, Centers for Medicare & Medicaid Services

This article is general information for employers, not legal or tax advice. Talk with your plan's legal counsel or tax advisor about your own situation.

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