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What is hospital indemnity insurance & when is it worth it?

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A three-day stay in the hospital can cost around $30,000.

No problem, you may be thinking, because you have health insurance.

Yes, your health insurance policy will probably cover most of the cost. But if like many policies, your plan covers 80 percent of the cost of hospitalization, then the remaining 20 percent is your responsibility.

That’s $6,000, which doesn’t include the deductible if you haven’t met it at the time you’re hospitalized.

This is a large expense for almost anybody, especially considering that nearly 40 percent of Americans can’t handle an unexpected expense of just $400 without going into debt, borrowing from friends or family, or skipping another bill payment.

One way to protect yourself against absorbing the potentially high cost of hospitalization is with hospital indemnity insurance. Let's take a closer look at what this type of coverage is (and isn't), how it works, and if it's worth it for you.

Hospital indemnity insurance definition

Hospital indemnity insurance is a type of policy that helps cover the costs of hospital admission that may not be covered by other insurance. Also known as hospital confinement indemnity insurance or simply hospital insurance, it is considered a type of supplemental health insurance. That means it’s designed to complement traditional health insurance, not replace it.

So, what does hospital indemnity insurance cover? Plans typically provide benefits to you when you are admitted to a hospital or Intensive Care Unit (ICU) for a covered sickness or injury. However, there are some policies that will also pay a benefit for outpatient surgery, emergency room visits, stays in a rehabilitation facility, and ambulance services.

Hospital indemnity policies typically pay a lump sum directly to you, not a hospital or medical facility. That means you can use the benefit for any purpose, whether to cover the cost of care or for a non-related purpose.

How does hospital indemnity insurance work?

Like with other types of insurance, you can buy your own individual policy or, if available, purchase through your employer’s group plan.

When enrolling in group hospital indemnity insurance, it's important to note whether the plan is employer-sponsored or voluntary. Under an employer-sponsored plan, the employer will cover some or all of the premium costs. Under a voluntary hospital indemnity insurance plan, you, the employee, are given the option to opt-in to coverage and pay the monthly premiums yourself.

Below are some other key considerations regarding hospital indemnity insurance

How much does hospital indemnity insurance cost?

There is a wide range of costs for hospital indemnity insurance. It will vary based on how much is covered, what the benefit amount will be, whether you include dependents on the policy, and whether you buy an individual or group policy. It can be as affordable as $7 a month or as much as $463.

How much do you get for hospital indemnity?

The policy benefit is usually based on the number of days you are hospitalized. For example, a policy that pays $250 per day will provide you with a lump sum of $750 if you spend three days in the hospital. There may be a limit to how many days the policy will reimburse you for; for example, a 30-day limit.

Policies also sometimes provide an Initial Confinement Benefit. This is an amount you would receive just by being admitted before the per-day benefit is considered. For example, if in the above scenario you have an initial confinement benefit of $500, you would receive a $1,250 total benefit.

Is pregnancy covered under hospital indemnity?

Plans may have an optional benefit to include childbirth. Depending on the policy, a hospital indemnity policy may cover the mother's admission to the hospital for normal labor and delivery, as well as an ill infant's stay in a neonatal intensive care unit.

Is hospital indemnity insurance tax-deductible?

The tax treatment of hospital indemnity insurance is a bit tricky. In fact, there had been longstanding confusion about the matter until the IRS stepped in to address the matter in 2017.

To summarize:

  • If an employer offers voluntary hospital indemnity insurance to employees where employees cover premiums with after-tax dollars, this will not be subject to taxes.
  • If an employer covers the cost of hospital indemnity insurance coverage for its employees, this will be subject to taxes.

How do I claim hospital indemnity?

If you experience a covered hospital admission, you will need to submit a claim to your insurance company in order to get collect benefits if your claim is approved.

Hospital indemnity insurance vs. critical illness insurance

Hospital indemnity insurance is similar to other types of supplemental insurance, but there are key differences in what is and isn’t covered.

One similar type of insurance is critical illness insurance. Like hospital indemnity insurance, critical illness insurance pays a lump sum if you qualify for benefits. You can use the money for whatever you need. However, critical illness insurance only covers certain health conditions, such as cancer, heart conditions, stroke, and organ damage, including transplants.

Critical illness insurance does not typically provide benefits for any expenses related to chronic conditions, such as diabetes. It will also not cover you in the event you are hospitalized because of a serious injury. And while some critical illness insurance policies are now being updated to cover COVID-19 and other infectious diseases, not all will.

If you had both hospital indemnity and critical illness insurance and suffered a condition covered by critical illness insurance, you could use the benefits of the former to pay for a stay in the hospital and the latter for any travel expenses, follow-up visits, or other needs.

Get a free critical illness insurance quote online in seconds.

Hospital indemnity insurance vs. accident insurance

You may have also heard of accident insurance. And at first glance, it may sound pretty similar to the focus of this article. So, what is the difference between hospital indemnity and accident insurance?

Accident insurance is a different type of supplemental insurance that pays out a lump sum if you incur specific kinds of injury as a result of an accident. Covered injuries may include dislocations, lacerations, concussions, burns, and other serious injuries. The benefit amount you receive depends on the diagnosis and severity of your injury, how your injury was treated, and the type of coverage you have.

An accident policy typically does not cover injuries resulting from illness. Therefore, if you were admitted to the ICU for COVID-19, an accident policy would not help you.

Hospital indemnity insurance vs. disability insurance

Another type of supplemental policy is disability income insurance. Also known as disability income protection insurance or simply disability insurance, this policy replaces part of your lost income in the event you can’t work due to an injury or illness. Think of it as insurance for your greatest asset — your ability to earn an income.

Disability insurance will not directly pay for any health care expenses related to an injury or illness. Rather, it covers lost income, so technically any money you receive in benefits from your disability insurance policy can be put toward health care expenses. After all, it's your money to use however you want.

Is hospital indemnity insurance worth it?

If you've read this far, you now know a whole lot more about hospital indemnity insurance than you did a few minutes ago. But there's one question you may still have unanswered:

Do I need hospital indemnity insurance?

The truth is, there is no one-size-fits-all answer. Supplemental policies like hospital indemnity insurance are designed to help you fill coverage gaps, which vary heavily from person to person.

If you want maximum protection against unforeseeable events, you may want to consider it. This is especially true if you have a high-deductible health insurance plan that will require you to meet a large deductible before your health benefits kick in.

At the same time, if you believe you have enough emergency savings to cover what your health insurance won’t, you may not need it. This is especially true if you’re carrying a sizable balance in a health savings account (HSA).

One other factor you may want to consider is how susceptible you may be to COVID-19. According to the latest data from the Centers for Disease Control (CDC), a total of 63,152 laboratory-confirmed COVID-19-associated hospitalizations were reported as of October 17, 2020. The overall cumulative hospitalization rate was 193.7 per 100,000 population.

With the possibility of being hospitalized increasing due to COVID-19, it may be wise to consider signing up for hospital indemnity insurance during your open enrollment period, if it’s available.

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.

— Published October 30, 2020
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