While insurance can save you a significant amount of cash, every insurance claim covered does not receive full cash coverage. Many policies have a deductible, where you will have to pay a portion of the costs before the insurance claim kicks in. That is what is called a deductible, and knowing what it is can help to make insurance bills much more predictable.
The definition of deductible insurance cost can be thought of as the amount you are willing to pay out of pocket for an eligible cost or loss covered. The deductible may be per claim or per year of coverage depending on your insurance policy.
This tiny number on your plan can make a significant difference in your financial status. Your deductible could also affect how much you pay, the cash flow necessary to pay for your deductibles, and whether making a policy claim is worth it if it is a relatively small amount. How deductibles work and what U.S. consumers should know before they select one.
What Is an Insurance Deductible
Insurance Deductible: Refers to the coverage required to pass between the policyholder and the insurance company, where the policyholder is responsible for a certain amount of the covered loss or services before the insurance company pays its portion, as per the terms of the insurance policy.
Best explained by an illustration.
Assume that you have collision coverage with a $500 deductible on your auto insurance plan. You are involved in a covered accident, and there is $3,500 in damage to your vehicle. If the entire repair bill is covered, your part will be $500, and the insurance company will pay the rest, $3,000.
It might sound like a simple idea, but deductibles in insurance policies are not the same on all types of policies.
For instance, health insurance plans typically have a deductible that builds during the course of a plan year. Eligible health care costs can be paid up to the amount of the deductible. This does not mean that you will not have to pay a co-pay or co-insurance on some of your medical expenses.
Auto- and homeowners’ policies often operate in distinct ways. A deductible may be applied to an insured claim rather than adding up over the year.
Another difference between a deductible and your premium is that. Your premium is what you pay to maintain insurance coverage. Your deductible is generally not lowered by the payment of your premium.
An easy way to recall the difference is:
- Premium: The amount that is paid to maintain insurance coverage.
- Deductible: The share of the covered expenses or losses you are responsible for paying out of pocket.
- Copay: A specific amount that you might have to pay for using a health care service.
- Coinsurance: A copay that is a percentage of the healthcare costs covered by your policy.
The amount you must pay “out of pocket” for covered health care costs in a health plan in a year.
Being aware of these distinctions is particularly significant when shopping around for policies since you are not necessarily going to be paying the least with the lowest set of premiums.
How Does an Insurance Deductible Work
The general concept is that you’re responsible for some money and the insurance company is responsible for the rest. The terms of the payment depend on the policy, and when it is paid depends on the time and conditions of the policy.
Let’s say that a homeowner’s insurance policy has a $1,000 deductible. Damage criteria for a covered event is 10,000.Theinsurermaypaythetotalcost(10,000) minus your $1,000 deductible, for a further payout of $9,000.
It doesn’t mean that you necessarily send a $1,000 check to the insurance company. These deductibles are simply subtracted from a claim payment by the car insurance company for property claims.
Next, let’s think about health insurance.
If you have a deductible of $2,000 per year, then throughout the year, you are provided with health care covered by this deductible. Typically, negotiated and/or allowed costs are paid to you until the eligible spending amount of $2,000 is reached.
Even if the deductible is met, that does not necessarily mean that healthcare is free.
Then, your plan might start sharing the cost with you. With a 20% coinsurance, you might pay 20% of the allowed amount for an eligible service, and the plan pays 80%, depending on the plan’s rules and regulations.
This goes on until the out-of-pocket maximum is met for the plan that they choose. After this point, a typical health plan will come in and pay 100% of covered in-network benefits for the rest of the plan year.
Some services also may be covered before you reach your deductible. Your policy papers spell out what you’re covered for.
How Deductibles Work in Health Auto and Home Insurance
Deductible” is used in a number of insurance products—but if you operate under the assumption that it is the same with every product, you can end up with some pretty harsh misunderstandings that come with an expensive price tag.
Health Insurance Deductibles
An insurance deductible is a common year-round component of health insurance.
For instance, suppose your plan has:
- $2,000 annual deductible
- For everyone that exceeds the deductible, 20% coinsurance is applied to the remaining costs.
- $6,000 out-of-pocket maximum
At the beginning of the year, you are given $1,200 worth of medical care that meets your deductible. You pay that amount, leaving $800 of your deductible.
In the future, after that service is done, another service for which you are eligible is $1800. The initial $800 may end up paying off your deductible. The balance of the eligible amount for which cost sharing may then be determined based on your plan.
Assignments for the prevention work can vary. Qualifying preventive health services may be covered by your health plan (without a deductible).
Another option can be a family plan. Some even have individual deductibles to apply to each family member as well as a family deductible, and other options include an aggregate family deductible. Checking the Summary of Benefits and Coverage can help you understand your particular plan.
Auto Insurance Deductibles
Auto deductibles are not usually one amount the entire way into the calendar year, but are associated specifically with certain coverages.
Deductibles are frequently found with collision and comprehensive coverage. If your car has $4,000 worth of damage from a covered collision, and your deductible is $1000, the insurance provider may pay for $3,000 of the covered damages.
Also, in a practical sense, if the actual damage to your vehicle is $800, and your deductible were $1,000, then you wouldn’t receive any money from the insurance company.
An auto policy may not have a consistent deductible for all the coverage portions—examine each individually.
Homeowners Insurance Deductibles
Usually, a home insurance policy will include a deductible for any property loss that’s covered.
Some policies include a set dollar deductible, for instance $1,000 or $2,500. Others could have deductibles for specific risks expressed as a percentage.
It is worth special attention that percentage deductibles are sometimes based not on the amount of the loss but on the insured value of the home.
When a home is fully covered with an insurance policy of $400,000, a specific deductible amount may be $8,000, or 2% of the insurance coverage.
That is a lot different from reading a $2,000 deductible on a policy, so you’ll need to see what your deductible is, either as dollars or as a percentage.
High Deductible vs Low Deductible: Which Makes Sense
Partly, choosing a deductible is a compromise between your regular payment and what you may have to pay for using your coverage.
Generally, a higher deductible may result in a lower premium since you’re willing to take on more money up front. Often, the lower you can keep your deductible, the more likely you will have a higher premium because the insurance company will be starting to pay out sooner when a covered loss occurs.
Neither choice is automatically better.
A higher deductible may be worth considering when:
- You’ve got sufficient emergency savings to deal with it.
- Reducing recurring premium expenses is important to you.
- You are aware of the extra risk of money.
- Depending on the type of insurance, you don’t often make claims or use covered services.
A lower deductible may appeal when:
- A major surprise in your budget will be tough for you.
- You are looking for a more certain financial liability.
- When comparing health plans, you are looking for a plan that is going to have a high level of health care services.
You are comfortable with a higher repeat payment.
When looking for health insurance, however, don’t just look for a deductible. Consider premiums, copayments, coinsurance, prescription coverage, provider networks, and the out-of-pocket cap.
If you’re choosing coverage for an automobile or home, there’s a very simple question you can ask yourself before choosing a high deductible: If an incident were to happen, would I be able to pay this deductible tomorrow?
If the answer is no, then the premium savings might not offset the financial squeeze caused by a claim.
Deductible vs Copay, Coinsurance, and Out-of-Pocket Maximum
The terminology becomes confusing when more than one type of cost is found on a plan.
Consider a hypothetical policy with a $2,000 deductible, 20% coinsurance, and a $6,000 out-of-pocket maximum.
deductible is the portion of costs that you must contribute toward services that are covered under the plan before the plan pays for those costs, as outlined in the plan document.
After the deductible is met, you may still have to pay an additional 20% of costs covered by the insurance plan, with the insurance company paying 80% after that.
A copay is different. Typically it isn’t a percentage, but rather a fixed dollar amount for a covered service like a doctor visit or prescription. The order of copay and deductible payments varies by plan—either copay or deductible may come first and then the other. Some plans may collect a copay before the deductible, and others may collect a deductible before a copay, depending on the plan; your copay also may or may not be counted toward the deductible.
Lastly, the out-of-pocket maximum puts a cap on out-of-pocket expenses for covered in-network care that is potentially charged at a limit. Typically, deductibles, copays, and coinsurance are included in the out-of-pocket maximum, and premiums aren’t.
This distinction is crucial because you may not necessarily stop spending on health care once you’ve met your deductible. It is typically when the next level of cost share kicks in.
How to Choose a Deductible Without Regretting It Later
When you’re spending time looking for insurance, it can be easy to only pay attention to the premium because you deal with the premium each month. A more accurate comparison is looking at the predictable cost and what it will cost you when you need the policy.
The first question you should ask is, “How much money could you get into your hands right away?”
You may have a car insurance policy with a $2,000 deductible but only be able to cover $500 in case of an accident, making it hard to get repairs after the event.
On the health insurance side, make an estimate of health care that you will need for a year. Take any prescriptions, specialist visits, planned procedures, and other regular health requirements into account. Next, calculate the total potential expenditure across plans and not just the lowest monthly payment.
Be certain to check before signing up or changing coverage:
- What is the deductible amount: annual or per claim?
- Would there be a different deductible in every type of coverage?
- So what costs count toward its deductible?
- Does the policy have both an individual and a family deductible?
- Do any services get paid before the deductible?
- What is a property deductible – is it a dollar amount or percentage?
- What’s the situation once the deductible is satisfied?
- When does the deductible go away?
A helpful tip is to have at least your major house deductible readily available in an emergency savings account, if possible. Your deductible is that portion of your risk that you’ve decided to keep.
Frequently Asked Questions
Do I have to pay a deductible every time I use insurance?
No. That will vary according to the policy. Health insurance plans usually include an annual deductible, and insurance companies can modify the deductibles for car and house insurance plans on a policy-by-policy basis.
Does insurance pay 100% after I meet my deductible?
Not always. After the deductible phase-in is completed, health plans can have copays or coinsurance. Some policy terms, networks, limits, and exclusions also apply.
Is a $500 deductible better than a $1,000 deductible?
Both are not necessarily a healthier choice. A policy with a lower deductible might cost more, and a higher deductible lowers the amount you may have to pay on a claim that qualifies. Evaluate costs and readiness to deal with an unexpected expense.
Does my monthly insurance premium count toward my deductible?
Generally, no. The premium you pay is to keep the insurance policy in place and will not usually be applied towards meeting the deductible.
What happens if a claim costs less than my deductible?
If coverage is on a per-claim deductible, the insurance company typically won’t make a payment for a covered loss if the loss total is under the deductible. In a big storm, for instance, $700 of covered damage and a $1000 deductible ordinarily puts no money in the pockets of the insurance company.
Conclusion
Once you understand deductibles, you’ll have a lot easier time assessing the full expense of insurance coverage. There is a deductible level, therefore the amount of financial obligation on your part, or shared with the insurance policy provider, but these vary greatly between health, motor vehicle, and homeowners coverage.
Review the deductible and coverage limit as well as the cost-sharing provisions, and how much you could afford in the aftermath of an unforeseen event before purchasing a policy. It’s a few minutes to learn about it today that can save an unwelcome monetary surprise when you eventually use your insurance coverage.
For more information, also read our related article here.