Hospital Indemnity

07/18/08

Hospital Indemnity Insurance

One insurance product that is typically available even to persons with pre-existing conditions is called “hospital indemnity” insurance. This insurance is usually sold to large group associations, but a single policy can be purchased from Physicians Mutual Insurance Company. It pays fixed amounts or “indemnities” for each day you are hospitalized. These policies have several characteristics that make them attractive under the right conditions.

First, they need not be purchased before they become useful. If you are not hospitalized very much, you would be wise merely to begin a file folder with all the information you obtain about such policies for which you may be eligible. At the appropriate time (discussed below), you can sign up for the various policies. Second, many of these policies simply have waiting periods for pre-existing conditions, not exclusions. Third, most of these policies are guaranteed renewable, and are issued to large groups. Thus, if you file multiple claims, your future coverage or premiums should not be affected. Fourth, these policies almost never have limitations or coordination of benefits provisions (although recently I have seen some policies that attempt to limit overall indemnity coverage). Thus, these polies -- unlike traditional health coverages -- are “stackable.” In other words, if it makes financial sense to have one policy, it may make just as much sense to have one hundred or one thousand such policies. And, these policies will usually all pay benefits directly to you, regardless of any other health coverage you may have. Because you pay the premiums, all proceeds are also nontaxable.

Because these policies will usually pay you in the range from $50/day to $300/day (some even double or triple the coverage for ICU stays), it is not difficult to establish eligibility for thousands of tax-free dollars (assuming you paid the premiums) every time you are hospitalized.

These policies are typically marketed to healthy people as a way to pay deductibles or copayments when they are hospitalized, so the policies are "cash cows" for the insurance carriers. This is especially true as hospitalization rates diminish. For that reason, the underwriting standards on these policies tend to be fairly "loose;" their real object is to sell policies -- to anyone!

Many of these policies only have a waiting period for pre-existing conditions -- not complete exclusions. So, the real trick is determining when, and how many, of these policies you should acquire. To do this, you need to determine the “index” of the various policies you could obtain. Each policy is usually offered for a fixed annual premium amount. By reading the policy, you can determine how many days of hospitalization it would take to recover your annual premium. For example, if your annual premium is $150, and a proposed policy pays $50/day beginning the 2nd day of hospitalization, you would need to be hospitalized for 4 days to collect your annual premium back in claims benefits. Your “index” for such a policy would be 4. For another example, if your policy costs $200/annually, and your policy would pay $125/day beginning on the 3rd day, you would have to be hospitalized for 4 days to collect your annual premium back in claims benefits. You should rate each policy similarly, and determine the payment index for each policy.

Next, you need to compare the index scores for each policy to your hospitalization history. When your average annual hospitalization rate exceeds the index on each policy, and if the hospitalization pattern is likely to continue, you should consider applying for that policy (assuming that it will, eventually, cover your chronic illness or disability). You should purchase no more policies than you can afford even when you are not hospitalized. Of course, if your average annual hospitalization rate is quite high, and you find yourself really raking in the dough, this can be a virtually limitless strategy. Only your imagination in determining what groups you can join to obtain this coverage will limit the amount of cash you can generate when you are ill. Additionally, if the biggest obstacle to your ability to work is hospitalization, this insurance can even serve as a crude substitute for disability insurance.

Now... "where do I find these cash cows?" See the discussion of Insurance Rocks.

Credit Life | Hospital Indemnity