Deductible: What Is It, And How Does It Work?
Insurance provides a financial safety net, whether it's health insurance covering your surgery, homeowners insurance helping you rebuild after a fire, or auto insurance offsetting the cost of getting your car back on the road after a major accident.
But this financial security doesn't come free. Health, homeowners and auto insurance all come with certain out-of-pocket expenses. And one of the biggest? Your deductible.
What Is An Insurance Deductible?
A deductible is the amount of money you'll pay out of pocket before your insurance coverage kicks in. Understanding how much your deductible is, and making sure you can afford it, is key when researching and choosing insurance policies.
How Do Deductibles Work?
Say your auto insurance comes with a deductible of $500. If you get into an accident that causes $3,000 worth of damage to your car, you'll have to pay for the first $500 of repairs while your insurer will cover the remaining $2,500.
Deductibles work similarly when it comes to homeowners insurance. Say your home is damaged by a fire that causes $10,000 worth of damage. If your homeowners insurance policy has a deductible of $1,000, you'd first pay that amount before your insurance covers the remaining $9,000.
High-Deductible Insurance Policies
As the name suggests, high-deductible insurance plans come with higher deductibles. This means you'll pay more before your insurer's coverage kicks in. The benefit of these plans is that they also come with lower monthly premiums.
These insurance policies, then, can be an affordable way to pay for insurance, whether health, car or homeowners, throughout the year. Make sure, though, that you can afford the deductible.
There are certain limits placed on high-deductible health insurance plans. According to HealthCare.gov, the IRS for 2020 defines a high-deductible health plan as one with a deductible of at least $1,400 for an individual or $2,800 for a family. The yearly out-of-pocket expenses for these plans, including deductibles, copays and coinsurance, can't be higher than $6,900 for an individual or $13,800 for a family.
Here's an example of how a high-deductible plan would work for auto insurance: Say you choose an auto insurance policy with a deductible of $1,000 because you like the lower monthly payments that come with it. If you should then total your car in an accident, resulting in a repair bill of $8,000, you'd have to first pay $1,000 before your insurer covers the remaining $7,000.
Low-Deductible Insurance Policies
Low-deductible insurance policies charge lower deductibles, so you'll have to pay less upfront before your insurer's coverage begins. There is a trade-off with these policies, though: Because the deductible is lower, your monthly premiums will be higher.
Say you take out an auto insurance policy with a deductible of just $250. If you get into an accident that results in a $2,000 repair bill to your car, you'll have to pay $250 on your own before your insurer covers the remaining $1,750.
Your monthly premiums will be higher, though. If you had taken an auto insurance policy with a higher deductible, your monthly premiums might be $100. With a lower-deductible plan, though, those monthly premiums might be $175.
Health Insurance Deductibles: A Closer Look
Deductibles are a bit more complicated when it comes to health insurance. First, deductibles are for yearly coverage. If you have a health insurance plan with a deductible of $2,000, you'd have to pay this amount before your insurance coverage kicks in to cover your medical expenses for the rest of the year.
Health insurance, though, might also come with copays and coinsurance. Copays are fairly simple: It's an amount you pay upfront whenever you visit your doctor or pay for a prescription. You might, for instance, have to pay $35 every time you visit your doctor.
Coinsurance is the percentage of your medical coverage that you and your insurer will cover once you've paid your deductible. Maybe your health insurance policy comes with coinsurance of 20%. After you meet your deductible, your insurance carrier will then cover 80% of your medical costs while you will pay for 20%.
Say you've met your deductible and have a surgery that costs $3,000. With 20% coinsurance, your insurer would pay for $2,400 of this surgery while you would pay $600.
Your health insurance plan might also come with an out-of-pocket maximum. This is the most you can pay each year for covered medical expenses. If your out-of-pocket maximum is $6,000, this means you can't pay more than this amount for your health care costs in a single year. This includes the money you spend on deductibles, copays and coinsurance.
Other Types of Insurance Deductibles
While deductibles are more complex for health insurance, they are equally important when you are choosing a homeowners insurance or auto insurance policy.
Always understand your deductibles before signing up for one of these policies. A higher deductible might result in lower monthly premiums for homeowners and auto coverage. But higher deductibles will also mean that you pay more whenever you need a payout from your policies.
Final Thoughts On Insurance Deductibles
When deciding on low or high deductibles, make sure to take a close look at your finances. If monthly cash flow is a challenge, you might consider plans with higher deductibles. These policies come with lower monthly premiums, which could help when money is tight.
But if you can afford the higher premiums, policies with lower deductibles might make sense. This way, if you suffer an auto accident or medical emergency, you won’t have to shell out as many of your own dollars before your insurer’s coverage begins.
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