What the Heck Is Fixed-Benefit Indemnity Insurance?

Image © Phil Ashley

While the name sounds like lawyer-inspired mumbo-jumbo designed to make you feel ignorant, you've probably actually heard of some types of fixed-benefit indemnity insurance, you just didn't know it was called by such a cumbersome name. Also known as fixed indemnity insurance,it's a type of insurance policy that pays a set amount when a covered event occurs.

Examples of fixed indemnity insurance in the United States health insurance realm include cancer insurance and critical illness insurance policies that pay a lump-sum cash benefit if the policy holder is diagnosed with cancer or with one of the covered critical illnesses.

It’s easier to understand what fixed-benefit indemnity insurance is if you break the phrase down into its components. Let’s do this with a theoretical fixed-benefit indemnity cancer insurance policy of $40,000.

  • Indemnity means protection against financial loss due to the covered event. In the case of the cancer insurance policy, you’re buying protection against financial loss due to cancer. Perhaps you’re worried that you won’t be able to work as much while you’re getting cancer treatment, so your income will go down. The insurance indemnifies (or protects) you against this potential financial loss.
  • A benefit is what an insurance company pays if a covered event happens. In the case of the cancer insurance policy above, the benefit is the $40,000 the insurance company pays you if and when you’re diagnosed with cancer.
  • Fixed means the benefit amount is set by the policy and won’t vary or change no matter how much your actual financial losses turn out to be. With the cancer insurance policy mentioned above, you’ll get $40,000 when you’re diagnosed with cancer. If your actual losses turn out to be only $5,000, you’ll still get the fixed $40,000 benefit; you’ll have extra money. If your actual losses turn out to be $100,000, you’ll only get $40,000 because the benefit is fixed. You’ll have to deal with the remaining $60,000 in losses yourself.

    Fixed indemnity insurance stands in contrast to insurance policies that pay a variable amount based on the cost of the covered event. Take, for example, comprehensive, major-medical health plans sold in the United States. Rather than covering just one or two diseases, these plans cover medical expenses associated with the prevention, diagnosis, and treatment of a full range of medical issues.

    Rather than being a fixed benefit, the benefit of comprehensive health insurance varies because it’s based on the cost of your health care. If you didn’t get any health care at all this year, the benefit your comprehensive health plan paid out was zero. If you required a $400,000 bone marrow transplant, the benefit was $400,000. The benefit of these plans isn’t fixed by the policy; it varies based on your health care expenses.

    Pros and Cons of Fixed-Benefit Indemnity Health Insurance

    The good things about fixed indemnity health insurance policies include:

    • There are no deductibles, copayments, or coinsurance required.
    • There’s no confusion about exactly how much the policy will pay.
    • It’s usually clear what events have to happen for you to get the money.
    • Premiums tend to be inexpensive.
    • You can buy a fixed indemnity policy through an insurance agent or directly from an insurer at any time. Unless you’re buying the policy as part of a job-based benefits plan, there isn't an open enrollment period.
    •  In many cases, the benefit is paid directly to you and you may use it as you wish. You don’t have to spend it on health care.

    The drawbacks to fixed indemnity health insurance policies include:

    • Medical care can be very expensive and the cost can be difficult to predict. With a fixed benefit, there’s a good chance your benefit amount won’t be high enough to pay the actual costs of your medical care if you become seriously ill, injured, or develop a chronic condition requiring long-term treatment. Your needs will likely exceed your benefit amount.
    • Because the type of covered illness or event is limited by the policy, there’s a pretty good chance that there will be a mismatch between the disease you actually develop and the disease you have fixed indemnity coverage for. If you buy critical illness insurance that covers cancer, heart attacks, strokes, and Alzheimer’s disease, but instead, you’re diagnosed with multiple sclerosis, your fixed indemnity critical illness policy will pay you nothing.
    • Since fixed indemnity health insurance policies don’t cover all of the essential health benefits, they’re not considered comprehensive health insurance and won’t protect you from the Affordable Care Act’s tax penalty for being uninsured. You’ll be considered uninsured if the only health insurance policy you have is a fixed-benefit indemnity policy. To avoid the penalty, you need to have comprehensive major-medical insurance like Obamacare, Medicare, Tri-Care, or an employer-sponsored group health insurance plan.
    • Although all insurance sold in the U.S. is regulated, fixed-benefit indemnity health insurance policies don’t tend to be regulated as heavily as major-medical health insurance plans. You may find that some of the consumer protections you’re used to in major-medical health plans are missing in fixed indemnity health insurance.

    Because of the drawbacks, most fixed indemnity health insurance sold in the United States is sold as supplemental health insurance. It’s meant to be used in addition to a major-medical health insurance policy, not instead of one.

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