Traditional Health Insurance Plans vs. Indemnity Policies

I began my career as a Supplemental Insurance consultant over 5 years ago. I constantly meet with people who have heard of the types of products someone in my field offers, but they have a hard time understanding exactly how it works. To increase understanding, I thought it would be good to put some information on my blog.

What is the difference between “traditional” Health Insurance and an Indemnity Policy?

As I wrote about in my last posting, a traditional health insurance plan is designed to take care of a majority of medical bills, typically after deductibles and copayments are satisfied. This may include bills from the doctor, hospital, urgent care facility, surgical center, hematology lab, sleep center, etc., etc., etc. The insured will often have co-insurance to contribute toward the bill above and beyond their copayment or deductible.

The payments from the insurance company are made to the doctor or facility; never to the policyholder.

An Indemnity Policy does NOT have to be paid to the medical provider. These types of plans are used to indemnify the policyholder (or compensate in the event of an injury, illness or loss). The money from an indemnity plan can be provided to either the policyholder or the doctor.

Some indemnity plans may pay the policyholder more than what the provider is charging. The policyholder can pocket the difference. In other cases the policyholder may try to negotiate with their provider to lower the cost of treatment if they pay cash.

Other indemnity plans (such as those offered by Aflac) are not designed to cover all medical expenses. Rather, they are meant to supplement a traditional medical plan and strengthen coverage that is already in place. And the cost is (in most cases) much less than one would expect.

The claims paid out by these indemnity companies are mostly paid to the policyholder. They are free to use the money they receive in any manner they choose, which means there is no obligation apply it toward medical bills. If they need the money to put food on the table, gas in the car or keep the lights on at home, they can. If they wish to put toward the doctor’s bills, they can. It is their choice.

Indemnity plans are a fantastic way to help reign in the unexpected expenses associated with an illness or injury. Supplemental insurance does not replace traditional insurance, but they can enhance it and make it work better. That’s why I say that “Without it, No Insurance Is Complete!”