Limited-Benefit Policies: Hospital Indemnity, Critical Illness and Accident-Only

Most health insurance is built around expenses: the insurer pays a share of what care costs. A limited-benefit policy is built around an event. It pays a stated amount when a defined thing happens, such as a hospital admission, a diagnosis of a named illness or an accidental injury, and it pays that amount whatever the care costs. Producers sell these policies in the same households that buy comprehensive coverage, and the sales go wrong when the buyer thinks one policy is doing the work of the other. The sections below define the terms, apply Michigan’s notice and advertising rules, and work one claim under each of the common types. Names and figures in the examples are invented and are not statutory figures.

Accident and Sickness

Michigan treats a health policy as one kind of disability insurance. A disability insurance policy insures against loss resulting from sickness, or from bodily injury or death by accident, or both, and it includes the granting of specific hospital benefits and medical, surgical and sick-care benefits to an individual, family or group (MCL 500.3400(1)(b)). Every policy discussed here fits that description, and the statute’s two words are the first test of what a policy covers.

An accident is an unexpected, unintended event that causes bodily injury: a fall from a ladder, a car collision, a dropped tool. Sickness is an illness or disease, and in practice a policy’s sickness benefits apply to an illness that first shows itself while the coverage is in force. The line between the two decides which benefit pays. A broken wrist from a fall is an accident. Pneumonia is a sickness. A policy that covers only accidents will pay for the first and not the second, and the reverse is true of a policy that covers only named diseases.

Limited Compared With Comprehensive Coverage

Comprehensive coverage, in the sense used here, pays for a broad range of medical care on an expense-incurred basis. The insured pays a deductible and coinsurance up to an annual cap, and the insurer pays the rest. Michigan bars an insurer from setting annual or lifetime dollar limits on essential health benefits in such a policy (MCL 500.3406z(1)) and from excluding a preexisting condition (MCL 500.3406ii(1)).

Limited coverage pays only a narrow benefit, or pays a fixed amount instead of reimbursing expenses. Michigan’s preexisting condition ban lists the kinds of coverage it does not reach: hospital confinement indemnity, disability income, accident only, long-term care, Medicare supplemental, limited benefit health, specified disease indemnity, coverage for sickness or bodily injury or death by accident or both, retiree-only coverage, stand-alone dental and vision plans, and other limited benefit policies (MCL 500.3406ii(2)(b)). A limited policy can therefore exclude a condition that existed before the coverage began, and many do.

Federal law draws a similar line. It treats a group of benefits as “excepted benefits” that are not subject to the main health coverage reforms in the same subchapter (42 USC 300gg-91(c)). Coverage only for accident, and disability income insurance, are excepted. Limited-scope dental or vision benefits and long-term care benefits are excepted if offered separately. Coverage only for a specified disease or illness, and hospital indemnity or other fixed indemnity insurance, are excepted if offered as independent, noncoordinated benefits. Medicare supplemental coverage is excepted if offered as a separate policy.

Feature	Comprehensive medical expense	Limited benefit
What triggers payment	Covered medical care	A defined event: admission, diagnosis, injury
Amount paid	A percentage of covered charges	A stated dollar amount
Link to the actual bill	Direct	None
Deductible and coinsurance	Yes	Usually none
Preexisting condition exclusion in Michigan	Not allowed	Allowed
Purpose	Protect against the cost of care	Add cash to a household’s resources

The purpose row is the one to teach a buyer. A limited policy does not replace comprehensive coverage. It adds cash.

Notice to the Buyer of a Limited Policy

Because a limited policy can be mistaken for something larger, Michigan puts the burden of clear disclosure on the insurer and the producer.

Notice in the advertisement. An advertisement for a policy that provides benefits for specified illnesses only, such as cancer, or for specified accidents only, such as automobile accidents, must state the limited nature of the policy. The statement must appear in type at least two points larger than the type in the body of the advertisement, in words identical or substantially similar to “this is a limited policy,” “this is a cancer only policy,” or “this is an automobile accident only policy” (R 500.655(7)). The rule covers the producer’s own sales material as well as the insurer’s, because an advertisement includes prepared sales talks and sales aids that an agent uses (R 500.651(b)(ii), (iii)).

Notice on the policy. An individual disability insurance policy, other than a group or blanket policy, must carry on its front page a notice of the right to cancel. During 10 days after the policyholder receives the policy, the policyholder may cancel and receive a prompt refund of premium, including a policy fee. For a policy sold by solicitation to a person who is eligible for Medicare, the period is 30 days (MCL 500.3409(1), (2)). A policyholder who cancels during the first 30 days is responsible for claims the insurer paid that were incurred before the cancellation took effect (MCL 500.3409(3)).

Limits and waiting periods. An advertisement that invites a purchase and mentions a dollar amount, a benefit period, the cost, a specific benefit or the loss for which a benefit is payable must also disclose the exceptions, reductions and limitations that affect the basic provisions, including any waiting, elimination or probationary period (R 500.656(1), (2)). It may not use the words “only,” “just,” “merely,” “minimum” or “necessary” to describe the effect of exceptions and reductions (R 500.656(3)). If the policy does not cover losses from a preexisting condition, the advertisement must say so in negative terms and may not say “no medical examination required” (R 500.657(1), (2)).

A producer who delivers a limited policy does more than hand over the contract. The producer states in plain words what the policy pays, what it does not, which waiting periods apply, and that it does not replace comprehensive coverage. That discussion is practice and not a rule, and it is what stands between the producer and a later complaint of misrepresentation.

Hospital Indemnity Policies

A hospital indemnity policy, also called hospital confinement coverage, pays a fixed daily amount for each day the insured is confined as an inpatient. It is a daily benefit that does not depend on the bill, the cause of the admission or what any other insurer pays. Policies usually say how many days of benefits are available for a confinement and how many for a year, and some pay a larger amount for days in an intensive care unit. Some begin the benefit on the first day of confinement. Others begin after an elimination period. The policy states these terms, and a producer reads them out.

A Worked Claim

Ines Kowalczyk owns a hospital indemnity policy that pays $300 for each day of inpatient confinement and $600 for each day in intensive care, for up to 30 days in each confinement. Her comprehensive plan has a $3,000 deductible, 80% coinsurance and a $5,400 annual cap on what she pays. She is admitted with pneumonia and stays five days, two of them in intensive care. The hospital and physician charges total $31,000, all covered charges under her comprehensive plan.

Comprehensive plan.

1. Ines pays the $3,000 deductible, which leaves $28,000.
2. Coinsurance at 20% on $28,000 is $5,600, so her uncapped total would be $8,600.
3. The $5,400 cap controls. Ines pays $5,400 and the plan pays $25,600.

Hospital indemnity policy.

1. Three regular days at $300 is $900.
2. Two intensive care days at $600 is $1,200.
3. The policy pays $2,100 to Ines directly. It makes no inquiry into the $31,000 bill.

Ines’s out-of-pocket cost under the comprehensive plan is $5,400. The $2,100 she receives from the indemnity policy leaves a net cost of $3,300, and she can use the cash for the deductible, lost wages or a child care bill. The indemnity policy did not pay any part of the hospital’s bill. It paid her.

A policy that has a waiting period for sickness changes the result. If Ines had been admitted in the second week after her indemnity policy took effect and the policy had a 30-day waiting period for sickness, she would have received nothing for pneumonia, although the same policy would pay at once for an admission after an accident. Michigan requires advertisements to disclose the existence of such a period (R 500.656(2)).

Other Coverage and Duplicate Indemnity

A provision that limits an expense-incurred policy’s benefits because of other coverage does not treat a hospital daily indemnity plan, a specified disease only policy or a limited occurrence policy as other coverage. Michigan’s rule describes a limited occurrence policy as one that pays only for intensive care or coronary care, for first aid outpatient expenses resulting from accidents, or for specified accidents such as travel accidents (MCL 500.3402b(2)). So the indemnity benefit does not cut the comprehensive plan’s payment, and the comprehensive plan does not cut the indemnity benefit. Two indemnity policies for the same loss are a different matter. Michigan allows an individual disability policy to include a provision that, if the insurer was not given written notice before the loss of other valid coverage on other than an expense-incurred basis, limits the insurer’s liability to its proportion of the total of like indemnities and requires a return of the excess premium (MCL 500.3440(1)).

Suppose Delia has two hospital indemnity policies with insurers that each include this provision. Policy A pays $300 a day and Policy B pays $200 a day. She told neither insurer about the other. She is confined for five days.

1. The total of like indemnities is $300 plus $200, or $500 a day.
2. Insurer A’s share is $300 of $500, or 60%, applied to its $300 daily benefit: $180 a day.
3. Insurer B’s share is $200 of $500, or 40%, applied to its $200 daily benefit: $80 a day.
4. Together they pay $260 a day, or $1,300 for five days, and each returns the excess premium.

Had Delia given each insurer written notice of the other policy before the loss, the provision would not have reduced either benefit, because it applies only when the insurer was not given that notice. The point for a producer is to tell a client who buys a second indemnity policy that the other insurer needs to be told, and to record that.

Advertising Rules That Apply to Indemnity Sales

An advertisement of a benefit that is conditional on confinement in a hospital may not suggest that the purpose of the policy is a net profit from being hospitalized. It may not use phrases such as “tax free,” “extra cash,” “extra income” or “extra pay” (R 500.655(5)). An advertisement of a confinement benefit may not state the benefit as payable monthly or weekly when it is based on a daily pro rata amount, unless the daily amount is emphasized and comes first, and any limit on the number of days must appear (R 500.655(6)).

Critical Illness Policies

A critical illness policy pays a lump sum when the insured is first diagnosed with a covered condition, and the policy defines each condition. The usual list includes heart attack, stroke, invasive cancer and kidney failure, and some policies add conditions such as major organ transplant. Practice varies: the policy may pay a reduced percentage for an early-stage condition such as carcinoma in situ, may require the insured to survive a stated period after diagnosis, and may pay only once for each condition. The definitions control. A diagnosis that does not meet the policy’s definition does not pay, however serious it is.

A Worked Claim

Neil Brandvold owns a critical illness policy with a $25,000 lump sum for a covered condition. It pays 25% of that sum for carcinoma in situ and requires a 30-day survival period for stroke and heart attack. The policy pays once for each condition.

1. Neil is diagnosed with carcinoma in situ. The benefit is 25% of $25,000, or $6,250.
2. Later, Neil has a stroke and is alive 30 days afterward. The survival period is met, and the benefit is the full $25,000.
3. The two benefits total $31,250.
4. His comprehensive plan separately pays his medical bills at its own deductible and coinsurance. The critical illness policy ignores those bills.

If Neil had died within 30 days of the stroke, the critical illness benefit would not have been payable, though the policy’s death benefit, if any, would be separate. That is one reason a producer reads the survival clause aloud.

Specified Disease Policies

A specified disease policy, also called a dread disease policy, covers a single named disease or a short list, with cancer the best-known example. Unlike critical illness insurance, which pays a lump sum, a specified disease policy often pays scheduled benefits for each part of treatment. It pays in addition to other coverage the insured has, and it does not reimburse expenses.

Michigan limits how it may be sold. An advertisement may not imply coverage beyond the policy’s terms or use synonyms for a disease so as to suggest broader coverage, and it may not be used if its purpose appears to be to induce fear. It may not use statistics, words, symbols or characteristics calculated to arouse fear, alarm, anxiety, dread, shock, fright or panic (R 500.655a). The limited-policy notice described earlier also applies (R 500.655(7)).

A Worked Claim

Walter Ostrowski has a cancer-only policy that pays $2,000 on first diagnosis, $150 for each day of hospital confinement for cancer, and $500 for each month of outpatient chemotherapy.

1. Walter is diagnosed with cancer. The policy pays the diagnosis benefit of $2,000.
2. He is admitted for eight days of treatment. Eight days at $150 is $1,200.
3. He has chemotherapy for four months. Four months at $500 is $2,000.
4. The policy pays $2,000 plus $1,200 plus $2,000, which is $5,200.

In a later year, Walter is hospitalized for six days after a heart attack. The cancer-only policy pays nothing, because the confinement was not for cancer. Heart disease is not the named disease. A buyer who thought “cancer-only” meant “serious illness” learns the difference only at the claim, and the notice rule and a clear sales conversation are meant to prevent that.

Accident-Only Policies

An accident-only policy pays scheduled benefits for injury caused by an accident, and it pays nothing for sickness. A typical schedule pays a fixed amount for emergency room treatment, a larger amount for a fracture depending on the bone, a sum for ambulance transportation, and a small sum for each follow-up visit. Policies commonly require treatment within a stated period after the accident, and they list exclusions that often include war, intentional self-inflicted injury and certain hazardous activities.

A Worked Claim

Lucia Marchetti has an accident-only policy with this schedule: $250 for emergency room treatment, $1,200 for a fracture of the wrist, $300 for ground ambulance transportation and $50 for each follow-up physician visit, up to six visits.

1. Lucia falls from a ladder and breaks her wrist. The ambulance takes her to the emergency room. She has three follow-up visits.
2. The policy pays $250 for the emergency room, $1,200 for the fracture, $300 for the ambulance and $150 for three visits at $50.
3. The total is $250 plus $1,200 plus $300 plus $150, or $1,900.

Two months later Lucia is hospitalized with appendicitis and has surgery. The accident-only policy pays nothing, because appendicitis is a sickness and not an injury by accident. Her comprehensive plan pays for the surgery, and a hospital indemnity policy, if she owned one, would pay a daily amount for the admission.

Putting the Policies Side by Side

Policy	Trigger	Pays	Does not pay
Hospital indemnity	Inpatient confinement	A fixed amount per day	Outpatient care, or admissions excluded by the policy
Critical illness	First diagnosis of a defined condition	A lump sum, sometimes in part	Conditions not defined in the policy, or conditions diagnosed before the survival period is met
Specified disease	Treatment of the named disease	Scheduled amounts for each part of treatment	Any other disease
Accident only	Bodily injury by accident	Scheduled amounts for injury treatment	Sickness

All four pay without regard to the insured’s actual bills, and all four may exclude a condition present before the coverage began. None pays what comprehensive coverage pays for a hospitalization, which in Ines’s case was $25,600 of a $31,000 bill. A household that owns only a limited policy has bought a cash benefit for a small premium and still has no coverage for the cost of care.

Choosing and Replacing

A producer who is asked whether a limited policy is enough should ask what the household already has. If the client has comprehensive coverage with a high deductible, an indemnity or critical illness policy can help cover the deductible and the household expenses that follow an illness. If the client has no comprehensive coverage, the limited policy fills almost none of the need, and the producer should say that before taking an application. Replacing a comprehensive policy with a limited one on the ground that the premium is lower misrepresents what the client is giving up. Michigan prohibits a statement that misrepresents the terms of a policy or the benefits promised under it (MCL 500.2064(1)), and prohibits a misrepresentation or incomplete comparison of policies made to induce a person to lapse, forfeit or surrender existing insurance (MCL 500.2064(2)).

Lesson summary

• A disability insurance policy in Michigan insures against loss from sickness, from bodily injury or death by accident, or from both. An accident is an unexpected, unintended event that causes injury, and sickness is an illness or disease.
• Comprehensive coverage pays a share of medical expenses. A limited-benefit policy pays a stated amount when a defined event occurs, whatever the care costs, and it is meant to add cash and not to replace comprehensive coverage.
• Michigan allows limited policies, such as hospital confinement indemnity, accident only and specified disease indemnity, to exclude preexisting conditions, which comprehensive health policies may not do.
• An advertisement for a policy that covers specified illnesses or accidents only must state its limited nature in type two points larger than the body of the advertisement, and an invitation to purchase must disclose limitations, waiting periods and preexisting condition exclusions.
• A hospital indemnity policy pays a fixed daily amount for each day of inpatient confinement, and the amount does not depend on the hospital bill or on other coverage.
• A critical illness policy pays a lump sum on first diagnosis of a condition the policy defines, and its definitions, survival period and partial benefits control what is paid.
• A specified disease policy pays scheduled benefits for one named disease and nothing for any other, and an accident-only policy pays scheduled benefits for injury and nothing for sickness.
• A producer states what a limited policy does not cover before the sale, and does not suggest it as a substitute for comprehensive coverage.