Is Hospital Indemnity Insurance Tax Deductible? What the IRS Says

Publication 502 lists which insurance premiums count as medical expenses. It also lists premiums you cannot include. The relevant items on the “can’t include” list are:

A hospital indemnity policy pays a set amount per day or per admission when you are hospitalized. That fits the description in the last bullet. So, for most people, hospital indemnity premiums are not a deductible medical expense.

The hospital bill itself is a different story. The deductible, coinsurance and copays you pay to the hospital are medical expenses. Those may count toward the medical expense deduction if you itemize, subject to the rules below.

See is hospital indemnity insurance pre-tax for how employers set this up.

Some employers let you pay hospital indemnity premiums before tax through a Section 125 cafeteria plan. That lowers your taxable pay today. But it can change how benefits are taxed.

In Chief Counsel Advice 202323006, released in June 2023, the IRS looked at fixed indemnity coverage paid through pre-tax salary reduction. It concluded that payments not tied to unreimbursed medical expenses were taxable wages, subject to income tax withholding, FICA and FUTA. That memo addressed wellness-style payments, but it shows the IRS view: pre-tax premiums can lead to taxable benefits.

Since hospital indemnity premiums are often small and benefits can be large, many people prefer after-tax premiums when their employer gives them the choice. Ask your benefits office which method your plan uses.

Even when an expense qualifies, you only benefit if you itemize. Publication 502 says you can deduct medical and dental expenses only to the extent they are more than 7.5% of your adjusted gross income.

Hypothetical examples to show the math. Because hospital indemnity premiums generally do not qualify anyway, this threshold mostly matters for your other medical costs, such as the hospital bill itself.

Self-employed people often ask whether they can deduct hospital indemnity like health insurance. Publication 502 explains the treatment of health insurance premiums for the self-employed separately, but its list of premiums you cannot include still covers policies that pay a guaranteed amount while hospitalized. Do not assume a hospital indemnity premium is deductible as self-employed health insurance. Confirm with a tax professional.

For coverage ideas, see hospital indemnity for self-employed individuals.

Hospital indemnity does not usually conflict with a health savings account. IRS instructions for Form 8889 list “insurance paying a fixed amount per day (or other period) of hospitalization” as permitted insurance. Having it does not, by itself, stop you from contributing to an HSA.

High deductible plan pairing is covered on hospital indemnity for high deductible plans.

For most people, hospital indemnity insurance premiums are not tax deductible. IRS Publication 502 specifically excludes policies that pay a guaranteed amount when you are hospitalized. The bigger tax decision is whether to pay premiums pre-tax or after-tax at work, because that can decide whether your benefits are taxed.