Simply Put: Fixed benefit insurance

Two colleagues on a Friday afternoon discuss the pros of a lump-sum benefit received in insurance.

Pravaah: I just completed my grandfather’s claim filing process for his stent replacement treatment undergone last year. I appreciate the insurance payout, but this is the third time filing for a claim in last two years, and honestly it can get tiring.

Jhalak: That’s why you should have considered a fixed benefit policy or popularly known as lump-sum policy for critical ailments. These are also cheaper in terms of premium. But looks like you went for an indemnity-based plan.

Pravaah: Indemnity and lump-sum, sound misty. Please explain

Jhalak: An indemnity insurance pays on actual loss incurred. So when you get admitted in a hospital and the procedure is done, the insurance will handle the payout, based on the billing done by the hospital. Raise the bill for reimbursement in indemnity. In a lump-sum insurance payment, which is generally offered for more serious ailments like cancer and heart diseases, you will be given a chunk of cash on confirmed diagnosis which can be used as per your requirement.

Pravaah: So on diagnosis, insurance payment is made ‘without’ any bills produced?

Understanding indemnity

When you get admitted in a hospital and the procedure is done, the insurance will handle the payout, based on the hospital bill. Raise the bill for reimbursement in indemnity

Jhalak: That’s right. Once the lump-sum is paid, the policy may terminate or stop coverage. That is an important distinction that must be understood by reading the policy document. In an indemnity policy, you can make repeated claims through the policy term.

Pravaah: Now I see. The insurance must match the risk characteristics. Realistically, I may need routine medical care for several ailments in a lifetime. But serious life-threatening ailments can occur only once in a lifetime, which is when life-changing payments would be required.

Jhalak: Yes, the same principle is applied in term insurance policies as well. On death of the policyholder, a lump-sum insurance amount is paid out.

Pravaah: How about differences in claim processing between the two?

Jhalak: As one would expect, indemnity policies need proper claim document with complete information and hospital bills to honour the claim. This implies that a few rounds of communication back and forth can be expected between the insurer and policyholder, if a reimbursement claim is made. This can be simplified in cashless claims processing. But a lump-sum insurance, by definition, has one clearly defined event as a pre-requisite for approval, which should simplify the process to a large extent.

Pravaah: As I see it, there is one other difference. With cash in hand from a lump-sum payout, you choose the institute, the doctor, the room, and level of service to treat the patient. But in an indemnity plan I am currently handling, I must keep in mind various sub-limits in room rent, co-pay, consumables and so on.

Jhalak: Yes. You explained that perfectly!

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