Deductible

Cut Rate

What is a Deductible?

An insurance deductible is the amount of your own money you must spend before your insurance company will pick up the tab.

You will encounter an insurance deductible in all types of insurance policies. The most common are home, auto, and health.

Because people tend to require medical care more often than they have car accidents or property damage, the insurance deductible on your health insurance policy is likely to be the most common instance of this concept in your daily life.


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How It Works

  • You pay the doctor for your visit.
  • You submit the bill or invoice to your insurance company to be reimbursed. This is called a “claim.”
  • If you have not yet met your insurance deductible, the amount of your claim that will be covered by your policy is reduced by that amount.
  • Once your insurance deductible is met, your insurance pays some or all of your costs.

Health Insurance

If you file a claim for $500 for lab tests and have a deductible of $1,000, you will be required to pay the full $500, and your unmet deductible will be reduced to $500. Health insurance policies carry a deductible for the calendar year, which is called a per policy deductible.

Lab Tests                    $500

Deductible                  $1,000

You Pay                      $500

Insurance Pays           $0

Remaining Deductible: $1,000 – $500 = $500

Auto Insurance

If you file a claim for $3,000 after an accident and have a deductible of $1,000, your insurance will pay only $2,000. Auto insurance policies typically carry a deductible that applies per claim, also called per occurrence, so each claim will be reduced by your deductible amount.

Homeowners Insurance

If you file a claim for $10,000 in fire damage and have a deductible of $5,000, only the additional $5,000 will be covered by insurance. Home and property insurance policies may carry a per occurrence or per policy deductible, so it is important to read your policy terms carefully.

Deductibles and Premiums

The deductible on a given policy is an important factor to consider when selecting your coverage. In general, policies with lower deductibles carry higher premiums.

A premium is the amount you pay each month to the insurance company to have coverage.

A deductible is the amount you must pay for services before your policy coverage applies.

Accordingly, you will have to pay a larger portion of the bill up front if you have a high deductible. Since the cost to the insurer is likely to be lower, it makes sense that this type of policy would carry a smaller price tag.


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Example

Assume you are looking for health insurance and have narrowed it down to two policies with identical coverage.

Health Insurance Deductible Example

Policy A has a deductible of $2,000, meaning that you are responsible for covering the first $2,000 of your medical costs for the year. After you meet that deductible, your insurance policy will begin to pay for some or all of the cost of your care.

Policy B, on the other hand, has a deductible of only $500, which could easily be met by an expensive medication, a trip to the emergency room, or lab tests. Because the insurance company for policy B will have to begin paying for your medical care sooner, the cost of this plan is higher than for policy A.

Things to Remember

  • Your deductible is the amount you must pay out-of-pocket before your insurance policy will cover your costs.
  • A lower deductible typically means you will pay a higher policy premium and vice versa.
  • If you are likely to make many claims on your policy, for example, if you need regular medical care, are involved in many fender benders, or live in a high crime area, choosing a lower deductible may benefit you, even if it means a higher premium.

Fun Facts:

  • The word deductible is derived from the latin word deductus, which means “to lead down or bring away.” Its modern root, deduct, means “to reduce”; your deductible reduces the amount of your coverage by requiring you to pay.

References

  1. http://www.iii.org/article/understanding-your-insurance-deductible
  2. https://www.insuranceopedia.com/2/5045/health-insurance/all-the-ways-you-pay-the-basics-of-premiums-deductibles-co-pay-and-coinsurance
  3. http://thismatter.com/money/insurance/insurance-deductibles.htm
  4. http://www.etymonline.com/index.php?term=deduct
  5. https://www.irs.gov/taxtopics/tc502.html

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