Financial Terms / C - D / Deductible

What is a deductible?

A deductible is the amount you pay before your insurance starts covering expenses. For example, if you have a $1000 deductible and get a $2000 medical bill, you pay $1000, and your insurance covers the rest.

Deductibles vary based on policy type and coverage level. Some policies, like liability insurance, may not have a deductible. Others, such as home or auto insurance, might have higher deductibles for lower premiums.

Types of deductibles include:

1. Dollar amount: A set sum subtracted from your claim payment.

2. Percentage-based: Calculated as a portion of the total claim cost.

Deductibles share risk between you and your insurer. Generally, larger deductibles mean lower premiums. They apply each time you file a claim, except in some cases like hurricane deductibles in Florida and Louisiana.

It's crucial to understand your deductible because it affects your out-of-pocket costs. Low deductibles usually mean higher monthly premiums, while high deductibles can save on premiums but increase your payment if you file a claim.

To save money, consider raising your deductible. Increasing your auto insurance deductible from $200 to $500 can lower your premium costs. Going up to $1000 might save even more. For homeowners and renters insurance, raising the deductible above $1000 can reduce policy costs.

Remember, you're responsible for paying the deductible when making a claim. Make sure you're comfortable with the amount you choose.

The Impact of Deductibles on Premiums

Changing your deductible has a big effect on your insurance premiums. When you raise your deductible, you'll pay less each month for coverage. This is because you're taking on more risk if you need to file a claim.

For example, let's look at auto insurance. A 34-year-old married man could save 29% a year by increasing his deductibles from $50 to $250 for comprehensive and collision coverage. If he bumped it up to $1,000, he'd save 56% yearly.

The savings can be even greater for expensive cars. With a 2010 Mercedes-Benz E350, switching from $50 to $250 deductibles saves $369 on physical damage premiums. Raising it to $2,000 saves $881 a year.

But it's not just about lower monthly payments. You need to think about the risk of paying more out of pocket for claims. With high deductibles, you're less likely to file small claims because repair costs need to be higher than your deductible before insurance kicks in.

Your choice depends on your budget and comfort level. If money's tight, you might prefer a lower deductible with slightly higher monthly premiums. This helps avoid a big repair bill all at once. If you have savings, you could opt for lower monthly premiums and a higher deductible.

To decide, compare potential savings to the extra risk. Think about how long you've been accident-free and multiply that by your yearly savings. Compare this to the deductible increase. This can help you weigh the trade-off.

Remember, it usually makes more sense to have a lower deductible for comprehensive coverage and a higher one for collision. This keeps your total premiums more affordable while balancing your risk.

Deductibles in Health Insurance

Health insurance deductibles are amounts you pay for medical care before your insurance starts to cover costs. For example, with a $2000 yearly deductible, you'll pay the first $2000 of eligible medical expenses before your plan helps.

There are two main types of health insurance plans:

1. Individual Plans: These cover one person. You need to meet your deductible before coinsurance kicks in.

2. Family Plans: These cover at least two family members and have two types:

- Plans with an overall family deductible

- Plans with both family and individual deductibles

In family plans, health care costs for all members count towards the family deductible. Once met, coinsurance applies to everyone.

Some plans cover preventive care at 100% without requiring a deductible. Others may waive it for certain health care costs.

Your choice of plan depends on your family's health needs:

High-deductible plans suit healthy families needing mainly preventive care. They have lower premiums but higher out-of-pocket costs.

Low-deductible plans work better for those with chronic conditions, pregnancies, or expensive prescriptions. They have higher premiums but lower out-of-pocket costs.

Remember, you're responsible for paying the deductible when making a claim. Choose an amount you're comfortable with.

FAQs

1. Is it more advantageous to choose a $500 deductible or a $1000 deductible?

A higher deductible, like $1000, typically results in lower monthly premiums, which can save you money if you don't often file claims. However, ensure you can afford to pay the full deductible amount out-of-pocket if needed.

2. What are the disadvantages of having a deductible?

The main drawback of a higher deductible is that you must cover more of your initial medical costs out-of-pocket before your insurance starts to contribute. This does not apply to preventive care, which is usually covered in full by most health plans if you use in-network services.

3. How do deductibles influence your expenses?

Insurance policies with lower deductibles generally come with higher premiums. This means you will pay more each month for your insurance coverage.

4. Which is better, a copay or a deductible?

Deductibles represent a cumulative amount you must pay annually before your insurance pays, while copays are fixed amounts paid for specific services. Copays tend to be more predictable and manageable as they are a fixed cost, whereas deductibles can lead to higher variable expenses depending on the amount of healthcare services utilized.