Generally, there are two different types of insurance plans that provide coverage in different ways:

I. Compensation Plan

A benefit plan provides a fixed amount of money to cover certain covered events or expenses. These benefits are usually stated in the policy and do not depend on the actual costs incurred.

Payment method: Benefits are paid regardless of actual costs.

• For example, if a certain event occurs (such as hospitalization or diagnosis of a critical illness), the policyholder will receive a predetermined benefit amount.

Predictability: The policy owner knows in advance how much he will receive from covered events, which makes cost planning easier.

Limited to Certain Amounts: Benefit plans are limited to predetermined amounts, and the owner is responsible for expenses that exceed these limits.

Less flexibility: Because benefits are fixed, they may not cover all actual costs, especially for expensive medical procedures.

II. Reimbursement Plan

Reimbursement plan, also known as an indemnity plan, reimburses the policyholder for actual costs associated with covered events.

Payment method: In this plan, the owner pays the covered cost from his own pocket and then submits a claim to the insurance company. The insurance company processes the claim and reimburses the policyholder for eligible expenses within the limits of the policy.

• Example: If the insured must be hospitalized, the insured pays the hospital directly for medical insurance and then submits a claim to the insurance company for eligible expenses.

Flexibility: Policy makers have greater freedom to choose healthcare providers and services.

Uncertain costs: Because claims are based on actual costs, policyholders may face greater financial uncertainty, especially if they experience a major medical event.

A bigger administrative challenge: policyholders must track their expenses, file claims and wait for reimbursement.

Potentially higher out-of-pocket costs: Depending on the insurance, out-of-pocket costs may be higher because the policyholder is responsible for paying upfront costs. However, in Motor and Health Insurance, with the increasing adaptation of Cashless form of claims settlement, this challenge is now no more there.

Summary

A defined benefit plan offers fixed benefits for certain events, while an indemnity plan reimburses owners for actual expenses up to the policy limits. It always is important to carefully review the terms and conditions of any policy to understand how benefits or benefits are calculated and paid.