Is Hospital Indemnity Insurance Worth It?

Hospital indemnity plans have been available privately and at work through companies like AFLAC, Allstate and MetLife for a long time.

However, with the higher deductibles brought on by the Affordable Care Act, these plans are more likely to be offered at work during your core benefits enrollment alongside critical illness and accident plans.

Because employers are now more likely to highlight hospital indemnity plans at open enrollment, many employees are wondering what does hospital indemnity insurance mean and is hospital indemnity insurance worth it?

What is hospital indemnity insurance?

Hospital indemnity insurance is a supplemental medical insurance plan that pays cash directly to you if you have to go to the hospital. If you don’t go to the hospital, then no benefits are paid.

What does it pay for?

While every hospital indemnity plan is different, you’ll probably see three core types of benefits especially in group plans offered at work.

• Hospital admission An initial, usually larger fixed benefit is paid if you are admitted to the hospital due to illness or accident.
• Overnight stay For each night in the hospital, a smaller daily fixed benefit is paid for each overnight stay in the hospital.
• Intensive care If you stay overnight in the hospital but are in intensive care, an additional fixed daily benefit is paid for each overnight stay in the intensive care unit.

In addition, to these core types of payments, you might see some other types of benefits offered in these as well. You are more likely to see these benefits in individually purchased plans but you could see them offered in group plans too.

• Emergency room visit A benefit is paid if you have to go to the emergency room for treatment.
• Outpatient procedure Benefits might be paid for certain outpatient procedures.
• Specified disease Normally specified disease policies are stand alone policies but you may see benefits for certain critical illness.
• Accidents As with specified disease, normally benefits for accident payments are in stand alone accident policies but it’s possible some benefits might be paid under a hospital indemnity plan.

Other types of benefits you might see added to both individual and group insurance plans include other less common things like medical evacuation, repatriation of remains as well as concierge type benefits like travel assistance due to covered qualified event to name a few.

Limitations on benefits

Benefits payable under these plans aren’t unlimited. It’s customary to see limits on the number of admission payments per year, limits on the number of overnights and limits on any other additional plan benefits. This means that your plan may not pay for every time you need hospital treatment.

You’ll want to read the contract to see what other types of limitations might exist. Unfortunately, if you are buying hospital indemnity insurance inside a group plan, you might not ever see the contract.

Not a replacement for health insurance

Keep in mind that hospital indemnity is a supplement to your medical insurance, it is not health insurance. It won’t pay for your medical bills from your doctors, hospitals or for your medications from the pharmacy.

While you may use the cash you receive for these expenses, hospital indemnity payments are meant to help you fill the gap for things not paid by insurance. Gaps that occur in medical coverage happen with things like deductibles and coinsurance.

Even then, your payment might not fill the gap completely or your payment could be more. Whatever the payment is, the payment is. No more no less, regardless of what your actual expense was.

In addition, some states require you to have an underlying health insurance plan before you can purchase a hospital indemnity plan.

Are hospital indemnity payments taxable?

The IRS has ruled that benefits paid by a hospital indemnity plan are not taxable unless the premiums are taken as pre-tax deduction out of your paycheck.

Most employers should be deducting these premiums on an after tax basis. If that is the case, or you pay your premiums directly out of your own pocket, the benefits you receive should not be taxable.

Example of how a hospital indemnity plan might help you

Recently, my wife had an unexpected trip to the hospital. After taking her to the emergency room, she was admitted to the hospital. She spent six nights in the hospital, three of which were in intensive care.

Once she recovered, the hospital and doctor bills started arriving. I think all the medical bills totaled more than $30,000. On our medical plan, we have a $3,000 deductible. This meant that of that $30,000 or so, $3,000 is our responsibility and we will be expected to pay it.

On top of that, one of the emergency room doctors was considered out of network which added another $1,200 above and beyond our deductible we shouldn’t be responsible for but are.

While my wife was in the hospital, she also missed six days of work. While she had enough sick time to cover her pay, her short term disability wouldn’t have kicked in until after 7 days and my wife was back to work by the 7th day. Because of that she wouldn’t have qualified for any payments from her short term disability plan.

A hospital indemnity plan would have paid us some cash to offset these expenses. Most likely she would have received cash for being admitted, staying overnight and a little more for each night of intensive care treatment that was required.

Without a hospital indemnity plan, those expenses have to be paid completely by us.

Reasons why you might consider getting a hospital indemnity policy

If you are presented an opportunity to buy a hospital indemnity plan, here are some reasons why you might want to take a look at it.

• High deductible health insurance plan The number one reason to consider a hospital indemnity plan is if you have a high deductible plan. This is for two reasons. Most people don’t have that kind of money set aside and if you even if you have that much money set aside in a health savings account, you can maybe protect it assuming it’s an HSA compliant plan.
• Planning on getting pregnant If you are planning on getting pregnant, a normal childbirth is two days in the hospital while a C-section is likely four. Unlike short term disability plans, group hospital indemnity plans don’t usually have a pre-ex that would exclude pregnancy.
• Over 50 years old Once you start getting older, the more likely it is you’ll get admitted to the hospital. Statistics show that once you reach the age of 50, there’s a greater than 10 percent chance you’ll be admitted to the hospital. And that percentage goes up each year you get older.
• Upcoming surgery If you know you are going to have a knee replacement or some other surgery you have control of when it happens, you might want to consider it.
• You have a chronic condition If you have heart issues, diabetes are on medications for other types of conditions, you are more likely to be admitted to the hospital. Here’s another study done by the AARP that shows the most common reasons older adults are admitted to the hospital.
• You missed open enrollment Sometimes, people miss open enrollment. If a hospital indemnity plan is offered to you during an off cycle enrollment, you might consider it. While not a replacement for health insurance, at least it’s something.
• It’s guaranteed issue If it’s guaranteed issue and you have some major medical problems you might want to consider it. It could help you get through pre-ex period on a critical illness policy for example.
• If it’s inexpensive If the cost is reasonable, then consider purchasing a policy. You are more likely to find that the basic core plans aren’t that expensive. Some of seen are under $200 per person per year which isn’t too expensive.
• No cash saved or to replace lost income If you don’t have much sick time or don’t have short-term disability, you might consider it. While it’s not disability insurance, it would still provide some cash you might need.
• Unexpected out of network expenses Even with a good medical plan, medical providers will still try and stick you with some unexpected expenses like my wife discovered when she got a bill from an out of network provider when she went to an in network facility for treatment.

Those are a few of the reasons you might take a look at buying a hospital indemnity program.

Remember, that at each open enrollment at work you can opt in or out. So while, I’m not a fan of people opting in and out of insurance programs, technically, if you time it right, you have that option to plan a little bit ahead of time to buy it when you think you might need it and drop it when you don’t think you would.

Are hospital indemnity plans good?

The thing about hospital indemnity plans is that it is insurance that pays you while in the hospital. But if you don’t go to the hospital, you don’t receive any benefits. In my wife’s case it would have been handy because the went to the hospital.

But if you don’t go to the hospital, then it won’t ever pay.

I should mention that part of whether an insurance plan is good or not boils down to the insurance company and the contract it offers as well.

Conclusion

I hope that helps you make sense of hospital indemnity plans and whether it might be worth it in your situation.

Let me know in the comments if you have used hospital indemnity and how it paid out.