Benefit Based vs Indemnity Based Products

Insurance plans help in managing the different types of risks that individuals face. These plans provide financial security.

There are different types of insurance products depending on the risks covered — life insurance, health insurance, motor insurance, travel insurance, fire insurance, etc. Similarly, when it comes to the payment of claims, insurance plans can be benefit based or indemnity based. 

Do you know what these plans mean or how they are different from one another?

If you don’t, here’s a complete analysis of benefit based and indemnity based insurance plans to enhance your knowledge of your insurance distribution journey.

What are Benefit Based Insurance Plans?

Benefit based insurance plans are those plans that pay a fixed benefit at the time of claim, usually in a lump sum. This lump sum benefit does not depend on the actual loss suffered. It is a pre-defined benefit that you get when you make a claim.

The most common example of a benefit based insurance plan is a life insurance plan. Under life insurance plans, in the case of the death of the insured, a lump-sum death benefit is paid. This benefit does not depend on the actual financial loss that the family suffers. On the contrary, it is pre-defined at the time of buying the policy.

So, for instance, you buy a term life insurance policy of Rs. 25 lakhs. In the case of death, the death benefit would be Rs. 25 lakhs. 

Types of Benefit Based Insurance Plans

Besides life insurance plans, here are other types of benefit based products that are available in the market:

What are indemnity based insurance plans?To understand indemnity based plans, let’s first have a look at the concept of ‘indemnity’. In insurance parlance, ‘indemnity’ means compensating for the actual financial loss that a policyholder suffers. An insurance policy, therefore, seeks to place the policyholder in the same financial position in which he was before suffering the loss. The principle of indemnity ensures that policyholders do not make a profit from their insurance policies. So, if you put the meaning of ‘indemnity’ in the context of indemnity based plans, it will become clearer to you. Indemnity based insurance plans are those that pay the actual amount of loss suffered at the time of a claim. For example, you have an indemnity policy of Rs. 5 lakhs and you suffer a loss of Rs.1 lakh. The indemnity plan would pay Rs. 1 lakh which is the actual loss suffered.Health insurance plans are a common example of indemnity based products. These plans cover your actual medical bills, i.e., the medical costs incurred when you suffer an illness or injury.So, suppose you buy a health insurance policy with a sum insured of Rs. 5 lakhs. And, your medical bills during the active policy period amount to Rs.3 lakhs. Then, the claim would be Rs. 3 lakhs which would directly cover your medical bills.Types of Indemnity Based Insurance PlansWhile most health insurance plans are indemnity-oriented plans, there are other products too that work on an indemnity basis. These include the following:
  • Motor insurance plans
  • Travel insurance plans
  • Home insurance plans
  • Fire insurance plans
  • Other commercial insurance plans
Difference between benefit based and indemnity based plansHere’s a comparative analysis between benefit based and indemnity based insurance products for a better understanding of the two variants.
Points of differenceBenefit based plansIndemnity based plans
Claim payoutA fixed amount of the claim is paid irrespective of the loss suffered.The actual amount of loss suffered is compensated by the plan.
Payout determinationThe claim amount is pre-defined. You know the amount of the claim that you would get beforehand.The claim amount is not pre-defined. It depends on the loss that you suffer
Types of plansLife insurance, critical illness plans, personal accident insurance, etc.Most health insurance plans, motor insurance plans, travel insurance, etc.
Payout usageThe claim paid can be used to meet any type of financial obligation that you have.The claim paid is, usually, used to pay for the losses that you have suffered.

Final Words

This article outlines the key differences between benefit based and indemnity based insurance products. As a distributor, you must understand the difference between these insurance plans. Only then you can pitch the right solutions when selling insurance plans.