What’s Hospital Indemnity Insurance, and How Does it Work?

Hospital indemnity insurance is a type of supplemental health benefit that helps employees cover hospital stay expenses. These plans pay a fixed cash stipend for every day the policyholder is in the hospital. 

This insurance isn’t a replacement for a primary health insurance policy but can be a valuable add-on for anyone worried about unexpected inpatient visits. Employees know if they’re hospitalized, they’ll have the financial flexibility to take care of themselves and their families. 

By offering hospital indemnity insurance as part of your benefit package, you provide peace of mind for your employees. But first, you’ll need to understand how it complements your existing healthcare options and affects your HR strategy. 

Here’s what hospital indemnity insurance is and what employers need to know. 

How Does Hospital Indemnity Insurance Work as an Employee Benefit? 

Hospital indemnity insurance is supplemental coverage that employees can purchase in addition to their primary health insurance policy. These policies can be separate: The hospital indemnity plan doesn’t have to be from the same provider as the primary health insurance. 

Employees pay a monthly premium for coverage. Hospital indemnity insurance rates vary depending on location, plan type, and coverage limits but typically starts around $10 per month(opens in a new tab).

With this insurance, employees receive a fixed payout for every day of their hospital stay. Insurance pays the policyholder directly. This differs from a traditional health insurance policy, where insurance pays the healthcare provider.

Policyholders can typically spend their hospital indemnity money at their discretion, but rules vary by insurance provider and specific policy type.

What Does Hospital Indemnity Insurance Cover? 

Hospital indemnity insurance provides flexible coverage for hospital stay expenses. Even a short hospitalization can significantly disrupt an employee’s finances and routine, and this benefit provides support that allows people to focus on their health and recovery. 

Here are some ways policyholders can typically use their indemnity benefits: 

• Health insurance deductibles

• Co-pays

• Out-of-network care

• Physical therapy or rehabilitation

• Housing and utility bills

• Transportation 

• Childcare

• Groceries

Policyholders receive hospital indemnity benefits when a covered event happens. While exact requirements vary from policy to policy, here are some common events that trigger coverage: 

• Emergency room admission

• Planned hospital stay for events like childbirth or surgery

• Intensive care unit (ICU) stay

• Ongoing hospital confinement

• Short-term stays in a skilled nursing or rehabilitation facility

Since benefits are paid directly to the policyholder, coverage isn’t limited to in-network facilities. Policyholders just need to prove they experienced a qualifying event to receive coverage. 

Exact coverage amounts and requirements vary. For example, some policies may provide a one-time payout upon admission, while others offer a fixed payout for every day the policyholder is in the hospital. Policies that provide a daily coverage amount usually have restrictions on the number of days covered. 

Some policies may have coverage restrictions for individuals with pre-existing conditions. For example, if an employee has been recently diagnosed with an illness, the policy may not cover hospital stays related to that illness in the first 12 months of coverage. Similarly, hospital indemnity insurance may not cover hospital stays for childbirth if the policyholder is already pregnant when they enroll.

Hospital Indemnity Insurance vs. Health Insurance: What’s the Difference?

Health insurance and supplemental hospital indemnity insurance are two different types of employee benefits. Hospital indemnity benefits can’t replace traditional health coverage: It doesn’t support services like routine doctor visits, diagnostic testing, and medication. 

Here are the key distinctions between hospital indemnity insurance and health insurance: 

What Employers Should Know About Hospital Indemnity Insurance

If you opt for voluntary hospital indemnity coverage, it won’t cost your organization anything to provide it, as employees cover the monthly premiums themselves. However, you can also choose to subsidize the hospital indemnity insurance. This increases your costs but strengthens your benefits packages. 

Communicate clearly with your employees about what’s covered and what’s not. Start with the basics: Clarify that hospital indemnity insurance does not replace a standard health insurance policy and only provides financial support during hospitalization. 

Here are some other details to explain to your employees when offering a hospital indemnity policy: 

• Covered events: Communicate what types of hospitalization are covered. This is a good time to address common misconceptions. For example, short-term observations don’t count as a hospital stay.

• Eligibility and enrollment requirements: Specify who is eligible for this benefit, when they need to enroll, and how to enroll. Hospital indemnity plans aren’t usually limited by the open enrollment window, which means employees can enroll at any time. 

• Premium amounts and payment methods: Provide clear quotes before employees enroll and specify how employees should pay for their plans. Some plans allow you to automatically deduct the premiums through the payroll process, while others require the employee to make monthly payments directly to the insurer. 

• Benefits and exclusions: Be specific about the exact benefit amounts employees will receive, as well as any limitations or exclusions that could affect their coverage. 

Eligibility, coverage amounts, and plan terms for hospital indemnity insurance vary significantly by provider and location. Be sure to direct employees to official plan documents and resources from the insurance provider for transparency. 

Help Employees Understand Their Benefits With Justworks

Hospital indemnity insurance can be a great perk, but for employees to get the most out of it, they’ll need to understand how it works and how it complements their existing benefits. 

Justworks PEO takes the administrative headache out of running your benefits program. This platform is an all-in-one solution for benefits management and HR support, helping you offer attractive perks without extensive manual work. 

When leaders need to spend their time managing growth, it can be nearly impossible to manage benefits administration and personalization. Through Justworks PEO, organizations can offer benefits that are typically out of reach for small businesses. 

Justworks PEO also provides your HR team with the resources to support employees reviewing their insurance options. Self-service dashboards let people compare and examine plans, while 24/7 HR guidance offers expert advice when your team needs it.

Get started today to see how Justworks can support your organization’s benefits strategy. 

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.

FAQ

Can Employees Keep Their Hospital Indemnity Insurance After Leaving Their Employer?

It depends on a variety of factors, including the insurer, the specific policy, and the employer’s rules. Some hospital indemnity insurance plans are portable, which means employees can keep their coverage as long as they keep paying the monthly premiums and the original employer keeps the plan active. However, other plans are only available to current employees.

Are Hospital Indemnity Insurance Benefits Taxable?

Hospital indemnity insurance benefits are generally non-taxable as long as you pay the monthly premiums yourself on a post-tax basis. However, if your employer covers the premiums and they’re paid pre-tax, your benefits may be taxable.