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What is an indemnity plan?
We’re all familiar with the basic of health insurance. We pay money every month to a company, when we need to see a doctor we pay a small fee and the insurance company picks up the rest; thats the really basic idea at least.
Most all health insurance today, whether Medicare, Medicaid, Marketplace insurance plan, most group plans, they all use what is called ‘managed care.’ Managed care is a system when there insurance company lets your doctors to just take care of you. That sounds like it would be a no-brainer, but before the ACA, insurance companies were super involved in the how and what type of care we received. Since the ACA, at least in all federally funded plans, managed care has become more prevalent. With managed care, our doctors work to keep up from getting sick, they have an incentive to keep us from coming back, so preventative care is really focused on.
Indemnity plans work the opposite of this. Instead of focusing on keeping us healthy, they instead only pay when we need to see the doctor. This type of system is called a Fee-for-Service. There is noting inherently wrong with a Fee for Service model. Before the ACA most insurance plans were like this, and it was found that paying for services rendered incentivized the doctors to keep people coming back. Since the ACA, and doctors are now graded on if they can keep patients healthy, the FFS model really only used a secondary insurance on most cases.
The word “Indemnity” stems from indemnify, which means to pay someone an amount of money if they suffer a loss or damage.
So how does it work?
Indemnity insurance works very differently than your standard health care plan. You have the freedom to see any doctor or specialist that you want. You do not need a primary care physician. There is never a referral required to receive care.
There are also some key differences when it comes to how you’ll pay for healthcare when you have an indemnity plan. For starters, you will pay for cost up front and then submit a claim to your insurance company for reimbursement. The cost that you do pay will be based on the average cost in your area. For some plans, there will be a deductible, but not all types of indemnity plans have this.
Details on how the plans work really depends on the type of plan in question.
Types of indemnity plans
Accidental insurance is probably the most common type of indemnity plans; these are sometimes referred to as supplemental insurance, because these plans are meant to be an added layer of protection on top of your existing major medical health coverage. Accidental insurance policies have a list of every type of accident that they cover, along with a dollar amount they will pay if that accident occurs. The money is paid directly to you and can be used to cover a deductible or other expense from your primary health insurance.
Critical Illness Insurance is similar to accidental, but instead of covering things like burns or cut fingers, it focuses on conditions and diseases that require extensive and expensive treatments. Plans often cover either cancer, heat attack & stroke, or the combination of the two. Some also cover things like needing organ transplant, or being diagnosed with Alzheimers.
While these policies can help soften the financial burden from needing costly medical care, they are not meant to cover the cost entirely. Most indemnity amounts range from $10,000 and up. Like accidental plans, this money is paid directly to you to use where you need it the most. Critical Illness is often added as a rider on to life insurance policies; it is referred to as a dread disease rider.
Hospital Indemnity Insurance is another type of fixed indemnity insurance that pays when you need to stay in a hospital. Unlike accidental insurance, this policy pays for both accidents and illnesses. With these plans you would receive cash payments from the insurance company for ICU visits, overnights at the hospital, needing an ambulance, or even rehabilitation after a surgery.
Many plans allow you to adjust the indemnity amount for certain things at a higher monthly premium
Traditional Indemnity Health Insurance are the last type of indemnity plans. These function more like a traditional health insurance plan, but offer you the flexibility of seeing the doctor you want while still having some sort of financial protection. These plans are very rare and are often only offered through group insurance. Coverage of preventative care and the ten essential health benefits vary by plan.
Pros & cons of indemnity health plans
As a standalone health plan, indemnity plans miss the mark in a lot of areas. That said, plans do vary, and some of them do a great job keeping you covered by offering preventative care and other essential health benefits.
Where these plans shine is a as supplemental insurance. They can offer relief to deductibles and copayments when you need emergency care. Plans can provide financial compensation if you injure yourself and need to take time off work to recover. Because the money is paid directly to you, you are able to spend it how you need too. It can be spent on medical bills, groceries, travel expenses, or supplementing income if you need to take time off work.
Critical Illness plans, either as a standalone of a rider, are great when purchased young. 1 in 3 people will at some point get cancer in their lifetime. Having and insurance plan to cover those expenses can help keep people from needing to dig into their retirement.
Accidental plans or hospital insurance plans, when paired with a major medical plan, can help to fill some of the gaps with deductibles and copayments.
These plans are not for everyone though. Some of the major drawbacks are that you may need to pay your bill in full before you can submit a claim (if you only have an indemnity plan). You will be reimbursed according to how the plan pays, but needing to have the funds to spend upfront isn’t for everyone.
Takeawyas
Indemnity plans can be awesome. I can fully endorse a critical illness plan, either a rider on a universal life policy or as a standalone. Accidental and hospital insurance can be great when you are young and need to supplement a high deductible health plan.
But again, these plans are not for everyone. Relying just on an indemnity plan can be challenging and waiting for reimbursement from claims can be painful if you need the money now.
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