Some people enroll in an insurance policy because of the monetary benefits it can provide. For example, life insurance policyholders pay premiums in order to continue providing income to their families upon their death. Or, a health insurance enrollee will use their coverage to help pay for expensive medical services.
A policy’s method of paying these benefits affects both how the benefits may be used and the practical value of the benefits. Whereas one benefit may provide great latitude in using it, another may require a single specified use. It’s best to understand the different ways benefits are paid out to properly judge any insurance policy or contract.
Knowing these three ways insurance pays can help you choose the right policy.
Paid upon the occurrence of a specified event, cash benefits provide a fixed payment, usually in a lump sum. Life insurance, for instance, pays a benefit upon the death of the insured. Also, many critical illness and supplemental policies pay benefits upon the diagnosis of certain illnesses. Insurers most often pay these benefits directly to a policyholder or beneficiary; however, policyholders can, in some cases, assign benefits to a provider of services.
Cash benefits are popular for a few reasons. The actual value of such a benefit remains unambiguous, being clearly stated within the policy. Also, insurers generally disburse the benefit in a single instance, using no needlessly elaborate schedules. Because the entire benefit depends upon a single occurrence, policyholders enjoy great freedom in how they use the benefit, sometimes preferring a purpose unrelated to the loss.
Nevertheless, the fixed nature of the benefit can present problems. A cash benefit need not relate to actual losses incurred. A cancer policy, for instance, may pay a benefit far below the charges for treatment. Also, a policy’s potential benefit may not warrant the policy’s premiums. Although a life policy paying millions of dollars may warrant a premium of tens of dollars monthly, a supplemental policy paying thousands of dollars may not warrant the same premium.
Incurred-expense benefits pay for actual losses. This type of benefit appears most often in health and long term care policies. An insurer often pays this sort of benefit to a provider of services.
Although sometimes subject to cost sharing and maximum limitations, incurred-expense benefits generally cover an entire loss irrespective of its size. Whatever expenses you incur, this sort of policy will pay them. With an incurred-expense benefit, you need not guess how much coverage you might need.
Of course, this very strength results in some difficulties. Because they face unfixed liabilities, insurers must charge more premium for such policies. Also, since insurers pay benefits to providers of services, you often have little discretion in how the benefits are used.
Indemnity benefits pay fixed amounts, often periodically. Common among disability, long term care and supplemental policies, indemnity benefits provide a specified amount generally on a per-day basis. A supplemental policy may pay a certain amount each day the policyholder stays in a hospital, and a long term care policy may pay for each day in an appropriate facility.
Although they have the potential to pay significant amounts, indemnity benefits often pay far less than what policyholders expect. The fixed payments remain unrelated to actual losses, and the only way to achieve significant benefit amounts may require accruing an unreasonable number of daily payments.
Because they typically pay smaller benefits, indemnity policies can be less expensive than their incurred-expense counterparts. You might want to consult an insurance agent to evaluate the merits of such a policy. Indemnity benefits in disability policies, however, might prove more useful since the benefits intend to cover costs not directly related to charges for services.
Insurers, like EPIC Specialty Benefits, pay benefits in a number of ways, and the differences often prove critical to evaluating a policy. By understanding these ways, you can choose a policy appropriate to your needs. If you need further clarification, contact a licensed insurance agent or an EPIC customer service representative for help.
“3 Ways Insurance Pays” was written for EPIC Specialty Benefits by Chester Carlton.