What Is an Insurance Deductible?

How Do Deductibles Work?

Insurance can help protect your finances and defray out-of-pocket costs after an accident, health crisis and other unexpected events, but it doesn't cover everything. Many insurance plans—including health insurance, auto insurance and homeowners insurance—-have deductibles that you must pay before the insurer pays for covered services.

Most deductibles are a flat fee, but some homeowners insurance deductibles may be a percentage of the home's insured value. After you meet your deductible, the insurance company covers its part of the bill. Depending on the policy, it may pay the remaining balance or a portion of it based on the plan's reimbursement rate.

Here are two examples that show how deductibles work in real life.

Example 1: Your pet insurance plan has a $500 deductible and an 80% reimbursement rate. Your puppy gets into a scuffle with the dog next door and needs stitches. The total cost for the vet to evaluate your pet, clean the wound, stitch up your pup and send you home with an antibiotic to help prevent infection is $750.

You're responsible for paying the first $500 of the vet costs. Your pet insurance company pays $200 (0.80 x $250) of the remaining $250, and you cover the final $50. If the total bill had been $500 or less, you would have been responsible for the full amount.

Example 2: Your home is insured for $400,000, and your homeowners insurance policy has a 1% deductible. Your teen decides to surprise you by making dinner, but instead starts a fire in the kitchen. Fortunately, you're able to put it out with the fire extinguisher you keep in the cabinet, and no one is hurt. But repairs will cost $12,000. Your share of the bill is $4,000 (0.01 x $400,000), and the insurance company pays the remaining $8,000.

Tip: Health insurance plans usually have annual deductibles you must meet each year when your plan renews. Auto and homeowners insurance generally have per-incident deductibles that you have to pay every time you file a claim. Pet insurance plans may have annual, per-incident or lifetime per-condition deductibles.

Deductible vs. Out-of-Pocket Maximum

A deductible represents your financial responsibility before your insurer shares the cost for covered services. An out-of-pocket maximum is the total amount you must pay for covered services during a specific time period, usually a year. When your out-of-pocket costs reach the maximum, your insurer pays for all eligible expenses for the rest of the year. Out-of-pocket maximums generally apply to health insurance plans.

Types of Insurance Deductibles

Deductibles vary based on the type of insurance policy you have. Here's a look at how they work for four common types of coverage.

Health Insurance

Health insurance plans generally have annual deductibles. When you receive care that applies to your deductible, you pay the full cost until you meet your deductible. After that, you only pay a portion of the bill, known as coinsurance, and the insurance company covers the rest. Your deductible resets when your insurance policy renews, and you must pay it again before your insurer picks up its share of the bill.

Not all covered services apply to your deductible. In those cases, such as when you visit your primary care physician, you may be responsible for a copayment instead. A copayment is a specific dollar amount that applies to certain services under your plan.

Auto Insurance

Many (but not all) common types of auto insurance coverage have deductibles attached to them. Deductibles often apply to collision, comprehensive, uninsured motorist and personal injury protection (PIP) but not to liability or medical payments (Medpay) coverage. Unlike health insurance, auto insurance plans generally require you to pay a deductible every time you file a claim.

Example: If you're at fault in a car accident and file a claim under your collision coverage for vehicle repairs, you must pay your collision deductible. Three months later, after a storm tears through your area, you file a claim under your comprehensive coverage to repair damage to your windshield and the roof of your car. You pay your comprehensive deductible before your insurer covers the rest, up to the policy limit.

Car insurance deductibles can range from $0 to $2,500, depending on the policy. If you have multiple types of coverage with deductibles, you don't have to select the same deductible for each coverage type.

Homeowners Insurance

The deductible for your homeowners insurance may be a specific sum, like $500 or $1,000, or a percentage of your home's insured value. Because state laws dictate how insurance companies may charge deductibles, options vary by state and insurer. Deductibles for standard homeowners policies might be accompanied by special deductibles for hurricane, wind and hail, flood and earthquake coverage.

Pet Insurance

Pet insurance plans often have annual deductibles, but some policies may have per-incident or lifetime per-condition deductibles. With an annual pet insurance deductible, you pay the total cost of care until you meet your plan's deductible. After that, you pay a portion of your pet's vet expenses, and the insurer pays the rest, similar to a health insurance plan.

Annual deductibles reset when your policy renews each year, but if your plan has a per-incident deductible, you must pay that amount each time your pet needs care for a new condition. Lifetime per-incident deductibles get paid once for every illness or injury your pet experiences for as long as you have your policy.

Is It Better to Have a High or Low Deductible?

Choosing a deductible involves trade-offs. Plans with higher deductibles typically have lower premiums but increased out-of-pocket costs if you need to file a claim, while plans with lower deductibles have higher premiums and lower out-of-pocket costs when filing a claim.

Selecting an amount that lets you balance the upfront expense of paying your premium with your ability to shoulder out-of-pocket costs if you need to file a claim can help protect your financial health.

When a Higher Deductible Could Be Better

Increasing your deductible in exchange for a lower premium may make sense if:

• You have sufficient savings. If you have adequate cash reserves to cover a higher deductible when you file a claim, selecting a higher deductible may make sense.
• You're young and healthy. You're more likely to experience health challenges as you age. If you're young, don't have preexisting health conditions, aren't at high risk of developing one and don't have dependents, selecting a higher deductible for your health can help reduce your premium. Because life is unpredictable, it's important that you can handle the cost of paying the deductible you choose if you're in an accident or receive an unexpected diagnosis.
• You don't expect to file many claims. If your risk of filing a claim is low, opting for a higher deductible may be a good option.

When a Lower Deductible Could Be Better

Choosing a higher deductible to save money upfront can be tempting, but it could end up costing you in the long run if:

• You anticipate frequent claims. If your pet has a habit of getting into mischief, your household has a new driver behind the wheel or you or a family member has a chronic health condition, choosing a lower deductible could help you save over time.
• Your finances aren't stable. If you're not confident you can come up with the cash to cover your deductible, opting for a lower amount can help preserve your financial health if you need to file a claim.

The Bottom Line

Understanding whether your plan has an annual or per-incident deductible, how the deductible you choose can influence the cost of your policy and the amount you'll pay if you need to file a claim can help you select the deductible that's best for your financial situation. It's important to review your insurance policies periodically to ensure the coverage, policy limits and deductibles you've chosen continue to meet your needs. If not, contact your insurer to find out how and when you can make changes.