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A key part of buying insurance is the deductible that applies to the policy. The amount of your deductible is what you'll be responsible for paying before your coverage kicks in when filing a claim.
Not all deductibles are created equal, though. Your auto insurance deductible might be $1,000, while your homeowners insurance policy may have a $2,000 deductible. In addition, the amount of your deductible can be adjusted, which can affect the cost of your premium. Read on to learn more about deductibles so you can put yourself in a more comfortable (and potentially less risky) financial position.
How Do Insurance Deductibles Work?
A deductible is the amount of money that essentially comes out of your pocket when an insurance claim is filed. Here are a couple of examples:
- If your health insurance plan has a $2,000 deductible, you're responsible for paying the first $2,000 of services covered by your plan. If a service costs less than your deductible, you'll cover the total cost of the medical need. If it costs more, say a $15,000 hospital stay, and your deductible is $2,000, you're only responsible up to the amount of the deductible. Your insurer pays the remaining $13,000 of the hospital bill.
- Let's say your car insurance policy has a $500 deductible and your car is involved in a crash that's fully covered by your insurer. Repairing the damage will cost $7,000. After the insurance company subtracts the $500 deductible, you'd receive a claim payout of $6,500.
There are two types of deductibles—dollar amount deductibles and percentage deductibles. The above examples illustrate dollar amount deductibles.
A percentage deductible is exactly what it sounds like: Instead of being responsible for paying a flat dollar amount, the amount you'll pay will be determined on a percentage basis. Let's take a look at how a percentage deductible would work on a homeowners insurance policy. If your home is insured for $250,000 and your policy has a 2% deductible, $5,000 would be taken out of a claim payout. So, if a fire caused a $25,000 loss covered by your policy, your claim payout would be $20,000.
Generally, the higher your deductible, the lower insurance premium you'll pay. The premium is the amount of money you pay, often on a monthly, quarterly or annual basis, for insurance. For instance, you might pay $1,500 a year for car insurance or $100 a month for homeowners insurance.
How Deductibles Vary by Type of Insurance
Of course, the deductible for an insurance policy varies depending on what type of insurance you have. Here's a look at how deductibles work for four common types of coverage.
With health insurance, the deductible is the amount you pay for medical services covered by your insurer before your coverage kicks in. So, if your annual deductible is $5,000, you must pay for the first $5,000 of covered medical services before your insurer starts to pay for services.
Usually, a lower health insurance deductible results in a higher premium.
Under federal law, health insurance companies can base your premium on just five factors when you're buying coverage on your own: age, geographic location, tobacco use, individual versus family coverage and level of coverage (like a bronze plan or a gold plan).
If you obtain health insurance through your employer, premiums don't work quite the same way. An employer may split the cost of a premium with an employee or cover it entirely. How premiums for employer-sponsored health insurance are calculated depends on factors like the employer's size, location and coverage offerings, as well as whether the employer must follow rules under the federal Affordable Care Act.
Aside from the deductible, two other out-of-pocket costs affect your health insurance: coinsurance and copays.
Coinsurance is the portion of your medical costs that you pay after you've reached your deductible. So, if your coinsurance amount is 20%, you're responsible for 20% of your covered medical bills, and the insurer is responsible for the remaining 80%.
A copay is a flat fee that you pay when you visit a health care provider or fill a prescription. For instance, you might need to come up with a $25 copay to the doctor for an office visit or $5 to a pharmacy for a prescription. Not all health insurance plans have copays, though.
While health insurance carries an annual deductible, an auto insurer requires you to pay a deductible every time you file a claim. Car insurance deductibles can range from $0 to about $2,500. So, if your deductible is $500 and you file a claim for a $5,000 repair to fix damage sustained in a covered crash, you'd be responsible for $500 of the repair bill; your insurer would cover the remaining $4,500.
Homeowners insurance policies provide dollar amount deductibles or percentage deductibles. The minimum deductibles on your policy may be $500 or 2%, for example. Deductibles for standard homeowners policies might be accompanied by special deductibles for hurricane, wind and hail, flood and earthquake coverage.
Pet insurance plans usually feature an annual deductible, along with reimbursement limits for every illness or incident, and caps on total reimbursements during the policy term. The coverage works much like health insurance for people.
How Do You Choose a Deductible Amount?
Choosing a deductible amount normally involves a trade-off. Typically, if you select a lower deductible, you'll pay less out of pocket when you submit a claim. However, your premiums will be higher. By contrast, if you select a higher deductible, you'll receive a lower claim payout, but your premiums also will be lower.
The decision boils down to this: Would you be comfortable with a higher deductible in exchange for lower premiums? Going with a higher deductible to reduce your premiums could force you to come up with perhaps thousands of dollars to make up your portion of a claim.
In many cases, an insurance policy will require a minimum deductible. For instance, the minimum deductible for auto insurance might be $200 while the minimum deductible for homeowners insurance might be $500.
The Bottom Line
It's wise to become familiar with the deductibles you'll pay in the event you need to use the insurance policies you have. This knowledge can make the difference between high premiums and high out-of-pocket expenses. It might also be a good idea to adjust your deductible if you think the premium savings would be worth it. If you have questions about your specific policy, or would like to adjust your deductible, contact your insurer.