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Hospital Indemnity Insurance: What Is It and How Does It Work?

Published January 26, 2021

4 minute read

Cora Walker

By Cora Walker

When looking at different options for supplemental health insurance, it’s possible you’ve seen the phrase “hospital indemnity insurance.” However, you might not know what it means. In short, hospital indemnity insurance is coverage for a cash payout specifically in the event that you are hospitalized.

Even with health insurance, a trip to the hospital can be very pricey. Hospitals provide intensive support to those with an immediate medical needs. Despite health insurance usually paying part of that, you could still be left with hefty bills. You could be responsible for thousands of dollars in out-of-pocket expenses. Something like short-term disability coverage can help pay the bills during the recovery period should you need it. However, the idea of an extra stopgap — if you can afford it — is certainly appealing.

It can be difficult to decipher insurance riders and add-ons. The language can be complicated and confusing. How do you figure out what they mean or if they are right for you? A lot of them depend on your cash flow, the likelihood you will need to make a claim, and whether or not you already have three-to-six months of savings stashed away. With about two-thirds of people who file for bankruptcy doing so because of medical expenses, it’s natural that you would look at all your options for coverage.

When Does Hospital Indemnity Insurance Pay Out?

When exactly your hospital indemnity insurance pays out will depend on the exact language in your plan. However, it generally means you were admitted to a hospital for at least one night. How much of the plan you make a claim for depends on the length of your stay. They typically pay out more money for each subsequent night you are admitted. Some plans may pay out more if you are admitted for certain conditions, such as heart attack or stroke. It will not, however, cover emergency room trips where you were not officially admitted into the hospital.

Can A Provider Deny My Hospital Indemnity Insurance?

No. Since hospital indemnity insurance is a sum of money paid to you relative to the terms of your plan, providers cannot deny your insurance. It’s a pretty black and white arrangement. If you stay overnight at the hospital, your indemnity insurance will payout the pre-set amount. As an additional option, you can likely use it to pay any deductible you may have.

Average Cost of a Hospital Stay

The ambulance ride alone can sometimes cost up to $1,200 or more. That’s even with insurance. Paramedics have high-pressure jobs and must often make difficult decisions in the field about whether you need to go to the hospital or not. They will almost always err on the side of caution. That means it’s very possible that you could transported to the hospital for an issue that your health insurance later deems was not medically necessary. That might leave you to foot the bill for the full cost of the ambulance.

The average cost of a hospital stay in the United States is $15,734. This number can be increased by the severity of your condition, whether you required surgery, stay in the ICU, or if you have pre-existing conditions that might complicate your procedure. All of these can end up costing you more money. If you have health insurance to pay a portion of that, then that can help. However, you could still easily be left with a bill in the range of $2000-to-$5000. Or more.

Insurance That Pays You Directly

In the event that you require hospitalization, your hospital indemnity insurance plan will pay out a pre-determined lump sum of money. You will be able to use it you like. You could use it to pay hospital bills, keep utilities up to date if you had lost wages, or perhaps pay for medications meant to help you recover. Like critical care coverage, hospital indemnity insurance is designed to support you through a sudden expense during an emotionally fraught time.

The important factor here is that the money is not sent directly to the hospital itself, to offset you bills. On one hand, that’s a good thing because you have more control over exactly where the money is spent. You may have different priorities than the hospital does. On the downside, it’s easier for you to make a financial mistake with the lump sum payment. If that happens, you’ll still have those hospital bills lingering over your head.

Is Indemnity Insurance a Replacement for Health Insurance?

Absolutely not. If you spend extra money on hospital indemnity insurance at all, it should only be after you have three-to-six months of your expenses saved away in an emergency fund. Ideally, hospital indemnity insurance comes as a supplement to existing insurance. Your priority should always be to make sure you’re covered for the widest range of conditions. You want to be able to access the many benefits of standard healthcare, including visits to a primary care provider and other maintenance services. Taking advantage of those benefits could help make a hospital visit less likely in the first place.

Much like critical care insurance, indemnity insurance is best used as additional or supplemental coverage only once you already have decent health insurance. You can likely add it to your existing plan for a small increase in your monthly premium. Like most types of insurance, you’ll have to weigh whether you can afford the increased costs against the potential need to be hospitalized. Accidents can happen to anyone, so it’s always a good idea to be as prepared as possible.


Cora Walker


Cora is a Northwest-based writer and editor who wants to make information as accessible as possible in the internet age. Video games are this writer’s primary vice. With a degree from the University of Washington as well as 5+ years of experience in web writing and publishing, Cora is here to share financial tips from experts and talk about good habits.

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