Why you need to supplement 'indemnity' health covers with 'defined-benefit' health insurance plans

For complete protection from rising medical costs, one needs both indemnity as well as defined-benefit type of health plans. Here's why.


By Sunil Dhawan

With the rise in lifestyle related ailments the risk of hospitalisation is also increasing. To make matters worse, the cost of hospitalisation is rising faster than general inflation levels. Therefore, the financial impact of a medical emergency or being afflicted with a disease can be unmanageable unless one has a health insurance plan as a back- up.

What kind of health plan - Indemnity plan or defined benefit plan?

Merely buying just about any health insurance plan may not suffice. Hospitalisation may not always be for general treatment or a minor ailment requiring a few days stay. There could be a medical emergency that may require only a few days of hospitalisation but coping with it after being discharged from hospital may require a large amount of funds. This typically happens if one is diagnosed with a life-threatening or a serious ailment such cancer, paralysis or kidney failure.

Therefore one should buy health insurance in such a way that it covers all medical needs i.e hospitalisation expenses as well as disease related expenses other than hospitalisation expenditure. This can be done by buying both kinds of health plans - an indemnity type plan and a defined benefit plan.

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Health insurance plans are broadly categorized as 'Indemnity plans' and 'defined-benefit plans'. While, Indemnity plans reimburse hospital expenses, defined-benefit plans pay a lump sum amount irrespective of the actual hospital expense. Yashish Dahiya, CEO and Co-founder, Policybazaar.com, says, "Ideally, you should consider buying separate covers for indemnity and defined benefit. This is because you may sustain illness that could result in higher claim which may not be covered under your indemnity plan."

Indemnity plans

As the name suggests, 'indemnity' health plans indemnify the insured against hospitalisation expenses up to the pre-defined limit i.e. reimburse the actual expense incurred during hospitalisation up to the sum insured under the scheme. The 'sum insured' in a health insurance policy represents the maximum amount of claim that the insurer agrees to settle or reimburse subject to the policy conditions. In indemnity plans the insurer reimburses the hospital bill up to the sum insured under the policy.

For example, if the sum insured is Rs 3.5 lakh while the bill amount is Rs 75,000, the insurer pays Rs 75,000 while the balance Rs 2.75 lakh remains unutilized but available for any other hospitalisation cost incurred during the coverage period. The hugely popular Mediclaim or the 'individual health plan' along with 'Family Floater' falls under the ambit of 'indemnity plans'. One needs to furnish actual hospital bills, discharge papers along with other documents for claiming insurance under indemnity plans.

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Defined-benefit plans

In the 'defined-benefit' type of health insurance plan, the entire sum insured gets paid to the policyholder if a pre-defined event (e.g. disease) occurs. The payout therefore is not dependent on the expense incurred during hospitalisation. Such plans include Critical Illness plans and Hospital Daily Cash (HDC) plans or any other health insurance plan which makes pre-defined payment(s) to the policyholder on the occurrence of a pre-defined event irrespective of whether and how much expense has been incurred on treatment.

One need not furnish hospital bills, discharge papers or other documents for a claim in defined-benefit policies as the diagnosis report by a certified doctor of the hospital is sufficient for claim. Under the Critical Illness plan, the sum insured is to be paid on diagnosis of any of the critical illnesses specified in the policy document. Irrespective of the actual expense incurred by the insured, the insurer has to pay the entire sum insured to the policyholder. The lump sum amount may be used by the policyholder to meet post-hospitalisation expenses including recuperative costs.
Similarly, under the Hospital Daily Cash plans, the basis of the claim is the 'number of days' hospitalised and not the actual expenses incurred. Let's say, someone is holding Hospital Daily Cash plan for Rs 1000 per day. He is hospitalised for 3 days and the actual hospital bill amounts to Rs 25,000. Under the Hospital Daily Cash plan, which is a defined-benefit plan, the amount of claim will be equal to Rs 3,000 for the three days stay in hospital.

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Further, health insurance plans aren't just restricted to non-life insurance companies. Even life insurers have health insurance offerings which are primarily defined-benefit in nature. So, Critical Illness plans or HDC can be offered by life insurers in the form of a separate policy or as a rider with a life insurance policy. Few life insurers also offer Unit-linked health plans (ULHP), which are again defined benefit plans. Under these plans, a portion of the premium goes towards medical coverage and the rest of the premium is invested in a fund that works similar to a mutual fund.

What to do: Different health insurance plans cater to different health insurance needs of an individual. 'Indemnity' health insurance plans, which could be Mediclaim or Family Floater, should form the core of your health insurance portfolio. One can then look at topping it up with a critical illness plan which is a defined-benefit plan and thereafter a Hospital Daily Cash plan to meet incidental costs during hospitalisation. But most importantly, adopt a healthy lifestyle to keep the ailments away.

Source: Economic Times


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