Plain version: a limited policy pays only for a narrow kind of loss, such as one named disease, a day in the hospital or an accident. It fills a gap next to major medical coverage; it does not replace it.
Five limited policies to know:
Travel accident: pays for accidental injury or death during covered travel, such as a stated trip or while riding a common carrier. Sickness is not covered.
Specified (dread) disease and critical illness: typically pays a stated amount when a listed disease or condition, such as a heart attack, is diagnosed.
Hospital income / hospital confinement indemnity: pays a stipulated daily benefit for hospital confinement (10 CCR §2540.5(e)).
Accident only: pays benefits for losses from covered accidents only (10 CCR §2540.5(h)).
Credit disability: insurance on a debtor that pays the installments coming due on a specific loan while the debtor is disabled as defined in the policy (Ins. Code §779.2(2)). Paying off the whole balance at death is credit life, not credit disability.
Fixed amounts ignore the actual bill. A $200-a-day hospital indemnity policy pays $800 for a four-day stay, whether the bill is $5,000 or $50,000 and whatever major medical pays. A critical illness policy with a $15,000 benefit pays $15,000 on a covered diagnosis.
The CDI outline groups limited benefit plans into four kinds:
Policies that pay benefits for expenses incurred for an accidental injury only.
Policies that pay fixed dollar amounts for specified diseases or other specified impairments.
Policies that provide benefits for specified limited services. The Insurance Code's term for one kind is a specialized health insurance policy: coverage in a single specialized area, such as dental-only, vision-only or behavioral health-only (Ins. Code §106(c)).
Indemnity policies and other policies that pay a fixed dollar amount per day, excluding long-term care policies.
California rules: specified disease and hospital confinement indemnity policies sold under Ins. Code §10198.61 supplement other coverage. The insurer must require that the person is covered by a medical, hospital and surgical policy or contract that is not itself designed as a supplement, and must certify that these policies are not marketed as a substitute for essential health benefits. Hospital indemnity paid on a fixed benefit, cash payment only basis falls outside the term health insurance (Ins. Code §106(b)(2)).