“Indemnity” is a basic fundamental of insurance…and there are certain types of insurance policies that may be referred to as “indemnity insurance” policies.
Indemnity Insurance for “Others”
Without going into mind numbing insurance speak, indemnity simply refers to the idea that you purchase insurance in order to protect yourself and reimburse someone who you may have “injured” financially or physically in order to make them “whole” again.
Indemnity Insurance for Yourself
You can also purchase an “indemnity policy” designed to protect yourself financially. This class of insurance is referred to as professional liability insurance. Examples of professional liability insurance include malpractice insurance for doctors and errors and omissions insurance for an insurance agent.
As professionals, doctors, lawyers and insurance agents are expected to do their job without making mistakes. But if and when a mistake does occur, the person or entity they are performing a service for may become “injured,” either physically or financially.
As a result, they may be sued for the damages they cause, and must have indemnity insurance to protect themselves and make the injured party whole again.
Life insurance isn’t considered “indemnity insurance” because it doesn’t compensate beneficiaries for actual economic losses – rather it pays out the entire policy sum to the beneficiary.
Health Insurance Indemnity
In addition to the indemnity insurance policies discussed above, there is also a health insurance indemnity policy available to consumers. This type of coverage is frequently referred to as “fee-for-service coverage.”
Health insurance indemnity is one of the earliest types of health insurance available to consumers. This type of coverage allows an individual or family to obtain health insurance coverage without being subject to a “network” of care providers the way a PPO or HMO would.
This is “old school” health insurance. It’s designed to save you from absolute financial ruin by way of medical costs. It is not for the faint of heart and is usually VERY expensive versus today’s HMO and PPO plans…again, no networks here.
The basic design of this coverage is as a “stop gap” to more serious health insurance claims, after your deductible is met and your percentage share of the remaining costs up to the stop gap are met. Stop gap coverage describes a plan that limits your total expenditure for a year.
Let’s look at an example…pay close attention to this one.
Your deductible is $1,000.
Your co-insurance percentage is 20% up to the out-of pocket maximum of $10,000.
With indemnity health insurance, your expenses would look like the following if you suffered a medical expense that totaled $51,000 (which would be the minimum dollar amount of a claim that would bring you to your out-of pocket-maximum).
You are responsible for the first $1,000 (your deductible). You are then responsible for the next 20% up to the stop gap (up to $10,000 – of your money). So, in reality, you are looking at 20% of $50,000 which equals $10,000) + your $1,000 deductible.
I understand this may be difficult to follow, but pretend like it is your money and it gets easier to wrap your brain around.