If you’ve been checking out your health insurance options, you may have come across a type of plan you’re unfamiliar with: fixed indemnity insurance. This article will remove some of the mystery by defining what it is, discussing its pros and cons, and looking at alternatives.
What is fixed indemnity insurance?
Fixed indemnity insurance is a form of supplemental insurance that pays out a set (“fixed”) dollar amount (“indemnity”) per day or per medical service. Your policy lets you know exactly how much the insurance company will pay when you’re hospitalized or receive medical treatment. Payment comes directly to you, not the provider of your services.
For example, one type of fixed indemnity insurance called hospital indemnity insurance, or hospital insurance, pays out a fixed amount of money to you for each day you spend in the hospital (i.e., $200 per day). The exact dollar amount of the daily benefit is specified in your policy. Your payout is limited to the preset benefit amount, regardless of how high your hospital bill is.
Fixed indemnity insurance is not major medical insurance or traditional health insurance. With traditional health plans, your policy typically includes deductibles, co-pays, out-of-pocket percentages, and other costs you’ll be responsible for. Payment is made by the insurer to the service provider.
For example, with a traditional health insurance plan, you see a doctor or other healthcare professional who is usually in your plan’s network of service providers, who then files a claim with your insurer to receive payment for treating you. The insurance company will pay them a percentage of their bill, typically 80%, and you’re responsible for paying the balance. However, no benefits are paid until you pay your annual deductible.
Pros & cons of fixed indemnity insurance
Before you complete an application for coverage, it’s important to understand the pros and cons of fixed indemnity insurance.
Pros
- Greater flexibility. There isn’t a network you must select your doctor or other healthcare providers from. You can choose to receive treatment from whomever you wish, and no referral is needed to see a specialist.
- No uncertainty over what the insurance company will or won’t pay. You know exactly what your benefits will be before you’re treated.
- First dollar coverage. No deductible needs to be met.
- You can enroll and cancel anytime you’d like. There is no open enrollment period.
- Premiums are typically lower than other types of health insurance.
Cons
- Can leave you with a large debt in case of a major medical event.
- Doesn’t cover pre-existing conditions, preventive care, or other “essential benefits” as defined by the Affordable Care Act (ACA).
- Limits your annual or lifetime benefit, which leaves you responsible for remaining costs.
- Doesn’t provide prescription drug coverage.
[ Related: What is a pre-existing condition? ]
Things to consider before buying fixed indemnity insurance
Fixed indemnity plans aren’t sold on health insurance exchanges, and they don’t follow ACA requirements; they’re sold by private insurance companies. Coverage and cost will vary by insurer, making it crucial that you carefully consider all of the aspects of any plan you’re considering, including
- The benefit amounts and limits (i.e., is there a limit on the number of days paid if you’re hospitalized?)
- When a coverage period begins and ends
- The amount of coverage for pre-existing conditions and if there’s a waiting period before benefits are paid for these conditions
- The plan’s annual and lifetime benefit caps
Before you apply, add up how much you’ll be paying in premiums and compare it to your expected benefit. Would you have the same amount of cash on hand for a medical bill if you put the premiums in a savings account?
Last, compare the policy’s benefit payment amounts with healthcare pricing in your area. In many cases, you’ll find that the payout won’t be significant enough to cover the medical bill. For example, a benefit payment of $3,500 for a hip replacement will likely be far less than the out-of-network cost for that procedure in any region of the country.
[ Related: Everything you need to know about out-of-pocket medical expenses ]
Alternatives to fixed indemnity health insurance
If traditional health insurance is not a viable option for you because of cost or insurability issues and you’ve decided that fixed indemnity insurance isn’t for you, you have several alternatives to consider.
First, you could “self-insure.” That means you’ll need to make regular deposits into a savings account or other type of account that you could quickly turn into cash that you can use to pay your medical bills.
The drawbacks to this alternative are the amount of time needed to accumulate an amount of money substantial enough to pay large bills caused by a significant medical event (cancer, heart attack, serious injury, etc.) and the fact that you may never be able to save enough for a catastrophic medical event.
Another alternative to a fixed indemnity insurance plan is by purchasing one or more supplemental insurance plans. These types of plans include:
- Critical illness insurance for things like cancer, stroke, heart failure, coma, etc.
- Dental insurance
- Vision insurance
Similar to fixed indemnity insurance, supplemental insurance plans pay a lump sum cash benefit directly to you, not your medical services provider. The benefits you receive can be used much like those paid by individual disability insurance and pay for deductibles, co-payments, and other out-of-pocket expenses.
You also have coverage from the ACA available to you. Health insurance from the marketplace is guaranteed to be issued regardless of any pre-existing conditions you may have, it covers prescriptions, and it includes maternity coverage. However, its well-publicized drawback is its cost.
Is fixed indemnity insurance worth it?
Fixed indemnity insurance may be a practical choice if you already have major medical insurance. Major medical insurance or a high deductible health plan (HDHP) can leave you with substantial out-of-pocket costs, considering their hefty deductibles and coinsurance percentages. Fixed indemnity insurance can pay some or all of any upfront costs or balances not paid by your major medical insurance.
However, be cautious if you’re going to use fixed indemnity insurance as a low-cost substitute for major medical insurance. Being attracted to these plans because of their lower premiums can be a costly mistake if you experience a serious medical event that leaves you personally responsible for thousands of dollars in medical bills.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.
