Whether enrolling in health care benefits with your company or shopping around for a new car insurance policy, you’ve probably come across a deductible. It sounds familiar, but what is an insurance deductible? This is part of an insurance policy that can affect the cost of your monthly premium and how much you’ll pay when you file a claim.
An insurance deductible is how much you’ll pay before your insurance company kicks in the rest. Selecting one you’re comfortable with is a key part of finding the right insurance coverage to meet your needs without breaking the bank.
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- An insurance deductible is the amount of money you’ll pay out of pocket before your insurance kicks in.
- The higher the deductible, the lower the monthly premium, and vice versa.
- Deductibles are designed to mitigate risk for the insurer.
What is an insurance deductible?
A deductible is an important part of an insurance policy. It’s the amount of money you’ll have to pay out of pocket if you file a claim. For example, if you get into an accident and need to take your car to the body shop. You’ll be on the hook for the deductible before your insurance company steps in to pay the rest.
Deductibles vary based on the type of policy you have. Auto insurance policies might have deductibles of a few hundred dollars, while health insurance plans can have in the thousand dollars.
How does an insurance deductible work?
When filing a claim on your insurance policy, you'll need to pay the deductible before your insurance coverage comes into effect.
Different types of insurance policies come with different types of deductibles. Health insurance plans usually require you to meet the deductible on covered services within a calendar year. Property insurance, on the other hand, will have you pay separate deductibles every time you make a claim.
For example, for health insurance, if you have a $1,000 deductible you'll be responsible for all medical bills until you've paid $1,000 and then your insurance coverage will kick in.
However, let’s say you get into three car accidents in a calendar year and you have a $500 deductible. You’ll have to pay $500 every time you claim with your car insurance company, totaling $1,500 for all three claims. If repairs are less than the deductible payment, you might decide it isn’t worth filing a claim and just pay for the repairs yourself.
If an insurance company waives a deductible, some people might attempt to file too many claims, thereby reducing the value of insurance. For instance, with a $0 deductible on a car insurance policy, some people might attempt to file a claim for every minor scratch and dent. The deductible, in essence, protects the insurer against this risk.
When it's time to pay your deductible, you won't be paying it to your insurer. Instead, you'll directly pay it to the auto body shop repairing your car or the medical office performing a service. The amount you pay gets deducted from the total bill, reducing the amount the insurance company pays the provider to fulfill their coverage obligation.
How is my insurance deductible determined?
There are two ways deductibles can be determined. Either as a flat dollar amount or as a percentage of the insured value of the property.
For car insurance, you typically can choose your deductible. The higher the deductible the lower the premium will typically be.
Homeowner's insurance deductibles are sometimes determined as a percentage of the value of the home. For example, if you have a home that is worth $500,000 and your deductible is 1%, you’ll be expected to pay a $5,000 deductible.
Health insurance is stated in the policy. For example, it may say something like a $1,000 deductible and then 80/20 co-insurance. This means that you'll have to pay the $1,000 deductible and then the insurance will pay 80% of the charges after that for the rest of the calendar year.
A high deductible insurance policy usually comes with more affordable premiums, signaling to the insurance company that you, the policyholder, are willing to take on more financial risk in exchange for a lower monthly premium.
How to choose the right insurance deductible
While you can shop around for a good deductible, you can’t avoid them. When figuring out which policy to choose, there are a few trade-offs you’ll want to consider.
You'll want to consider how much risk you are willing to take on. If you are living paycheck to paycheck and even $500 is going to be a financial hardship then you'll want a lower deductible, unfortunately, this means your rates will be higher.
However, if you have some money saved in an emergency fund and can afford $1,000 in unexpected expenses, then you'll want to consider a higher deductible and receive the benefit of the lower monthly premium.
How insurance deductibles influence your premiums
Insurance deductibles impact how much money you’ll be expected to pay out of pocket. It comes down to who bears most of the risk, you or the insurance company, and how much risk they are responsible for.
If you have a low-deductible plan, you are asking the insurance company to take on more risk. That can reduce your out-of-pocket expenses when you make a claim. However, it increases your monthly premium payment.
Insurance companies use deductibles to win your business. The insurance provider may offer a higher deductible to lower the monthly premiums, making the policy more appealing to you.
FAQs
What does it mean when you have a $1,000 deductible?
When you have a $1,000 deductible on an insurance policy, it means you’ll be expected to pay $1,000 out of pocket before your insurance kicks in.
For example, if you need to have a $10,000 surgery and have a $1,000 deductible, you’ll be responsible for paying the first $1,000 of the surgery bill. After that, your insurance provider will deduct your deductible from the total bill and pay the remaining $9,000.
Is it better to have a deductible or not?
Your deductible will largely depend on your situation. For health insurance, if you require extensive medical care, a zero-deductible or low-deductible policy might be a good option. Given the cost of medical treatments, it can save you thousands, if not hundreds of thousands of dollars over a year.
Unfortunately, some insurers don’t offer zero-deductible policies. You’ll be hard-pressed to find an auto insurance policy that does, for example. What they offer instead is a vanishing or disappearing deductible. This reduces your deductible over time for every year you drive and don’t have an accident.
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