TLO or Terminal Liability Option is a feature of stop-loss insurance. It protects a plan sponsor of a self-funded health plan in the event that the plan sponsor reverts to a fully-insured plan at the end of the plan year. A Terminal Liability Option extends the stop-loss coverage for a period of three or six months after the termination of the policy.
Most stop-loss insurance contracts have an annual policy period and cover claims paid during the policy period. A claim paid after the expiration of a policy period is usually covered by the next year’s stop-loss policy. However, if a plan sponsor chooses to go from a self-funded health plan to a fully-insured plan, there will be a gap in coverage. The new insurance policy will not cover claims incurred prior to the start of the policy period, and the old stop-loss policy will not cover claims paid after the expiration of the policy period.
A Terminal Liability Option covers this gap by reimbursing the plan sponsor for claims, both specific and aggregate, incurred during the policy period but not billed and paid until after the expiration of the policy period.
A plan sponsor must decide at the beginning of a contract year whether it wants a Terminal Liability Option. There are extra premiums associated with the TLO, which must be paid at the beginning of the plan period.