What is An Insurance Deductible? the Ultimate Guide

An insurance deductible is an amount you fork over before your insurance covers the rest of a claim.

Even though you hope you never have to file an insurance claim, you should know that you will at least be paid back in full if you do.

Not quite.

Your insurance deductible will be deducted by your insurance company before it makes any payments to you, so you’ll probably have to pay a portion of it out of pocket.

But if you are aware of how insurance deductibles operate, you may be able to save money. You should be aware of the following.

What is An Insurance Deductible?

In other words, it’s the amount that’s “deducted” from your insurance claim. Deductibles exist in nearly every area of insurance planning, from health insurance to auto insurance to pet insurance.

The purpose of a deductible is to share the risk between you and the insurance company. If you’re responsible for some of the costs, you might be less likely to file a claim or might be more cautious about coming across circumstances where a claim might be required.

You only have to pay your deductible once a year for some types of insurance. For others, you’ll have to pay your deductible each time you file a claim.

How Do Deductibles Work?

For some of the most popular insurance types, here is how deductibles operate.

Health Insurance

In the case of health insurance, your deductible is the amount you’ll pay out of pocket each year before your insurance covers the rest. Health insurance deductibles mean you only have to reach your deductible once per year. Each year your deductible amount will reset and you’ll have to start over. For instance, if you have a $1,000 deductible and pay $1,000 toward your first medical bill of the year, your insurance will start paying for the rest of the year, though typically not in full.

Advice: The average annual deductible is somewhere in the range of $1,000 to $10,000, but it can be as high as $20,000.

You’ll usually be subject to coinsurance, which is a percentage of each medical bill you’ll have to pay alongside your insurer. A typical coinsurance arrangement is 80/20, which means that your insurance company will cover 80% of the cost and you will be responsible for the remaining 20%.

There are, however, some expenses that insurance will cover before you’ve met your deductible.

“It’s worth noting that most preventive medical care–including annual checkups, immunizations, and well-woman services–are covered before your deductible,” Cantrell says. “In other words, you won’t be required to pay anything out of pocket toward your deductible when you receive them.”

Auto Insurance

With auto insurance, the main distinction is that, as opposed to having a single deductible that you must meet every year, you will be required to pay your deductible each time you submit a claim.

Deductibles for auto insurance can be anywhere between $250 and $1,000. Even auto insurance policies with $0 deductibles are an option (although, as you’ll see later, your premiums might skyrocket as a result). The typical car insurance deductible is $500, per American Family Insurance.

In general, auto liability insurance is exempt from auto insurance deductibles. Instead, they only apply for auto insurance policies that include collision and comprehensive coverage.

Homeowners Insurance

Homeowners insurance works similarly to auto insurance, where you have a deductible for each separate claim. Your insurance provider will pay the rest, up to the limits of your coverage, after you pay your deductible.

When compared to claims for auto insurance, homeowners insurance frequently results in much larger payouts, which is to be expected given that you are protecting a much more expensive asset. As a result, these policies frequently have higher deductibles.

Deductibles often start around $500, and can easily exceed $2,000. Unless you pay extra to have it reduced, the deductible is frequently set as a percentage of the home’s value.[3]

Pet Insurance

Pet insurance is unique because there are both annual deductibles and per-claim deductibles. You won’t be exposed to both, so don’t be concerned. Simply put, it depends on the insurance provider and plan you select.

An annual deductible is one that you’ll pay once a year, after which your pet insurance provider will cover all or the majority of your claims. If your policy has a per-claim deductible, you will be responsible for paying it each time you send your insurer a bill.

Renters

Because your policy covers only you and your belongings, not the physical structure of the building, renters insurance deductibles are always flat dollar amounts. No deductible is required in some situations, such as when liability claims are made against you or when you have added certain valuable items to your policy.

Renters insurance quotes tend to be lower than homeowners and thus result in cheaper monthly premiums, so raising your deductible may not have the same impact on your overall savings as it does with other coverages.

Life

This one is pretty straightforward: Deductibles are not present in life insurance policies. When there’s a “claim” on someone’s policy (that is, the insured person dies), the life insurance beneficiary receives the full benefits with no deductible taken out.

How to Choose a Deductible Level?

The two primary considerations when selecting a deductible are your ability to withstand risk and the amount you expect to spend annually on health care coverage. You might choose a plan with a lower deductible if, for instance, you regularly incur medical costs like prescription drug costs. This will enable you to pay off your deductible more quickly.

On the other hand, choosing a plan with higher deductibles may be the best option if you are still relatively healthy and young. As a result, premiums for plans with higher deductibles are typically lower. Until these deductibles are met, you are effectively not receiving any of the cost-sharing benefits of having coverage.

A more affordable health insurance plan with a higher deductible might be more sensible for those with low anticipated medical costs. This lowers your monthly premium payments, which in turn lowers your guaranteed out-of-pocket expenses. When choosing a plan, the sole factor to take into account is your ability to pay the necessary deductible in the event of an accident.

Understanding this trade-off will help you select the best health insurance option for your requirements. The health insurance plan’s deductible structure affects which one you select because it specifies when the insurer actually starts to pay.

Individual Vs Family Deductibles

Each health insurance plan stipulates both an individual and a family deductible, with the family deductible typically twice that of the individual. Understanding how these two values affect cost-sharing benefits is crucial for households with multiple family members covered by the same plan.

Beginning in 2016, deductibles for insurance plans became “embedded”. The health insurance provider started keeping track of the total deductible payments made for each family as well as the individual deductible payments made for each member of the household. Once one of two conditions is satisfied, the company starts to pay benefits.

There are typically two scenarios that play out for each individual in the family and the family as a whole:

1. The company will cover the cost-sharing benefits for that individual — and that individual alone — for the rest of the year if any family member meets the amount specified by the individual deductible.
2. The family will start making payments toward expenses for each member of the family for the remainder of the year if the family as a whole meets the amount specified by the family deductible.

Medical Vs. Prescription Deductibles

Another aspect of deductibles is that many insurance plans treat prescriptions differently than other services.

Prescription-related expenses are divided into separate deductible categories by some health insurance plans.

There is a prescription drug deductible in these circumstances, and it is calculated independently of all other medical expenses. Policyholders for such plans are required to pay for medication up to the amount specified before the plan covers these costs.

People who have a high proportion of their medical expenses driven by medical prescriptions may actually benefit from having a separate prescription deductible as these amounts are typically much smaller than their medical counterparts. For those whose prescription costs are high, plans with an Rx deductible make it simpler for them to start receiving the policy’s cost-sharing benefits.

Why Do Insurance Deductibles Exist?

Everyone is aware that the majority of insurance policies have some sort of deductible. Unknown to some is the reason. Here is a quick explanation.

In some cases, getting insurance for a small loss is pointless. Why? Because if it is eligible, it could be easily paid out of pocket and written off on your taxes. Besides, it can end up costing more than your recovery. Policy writing and claim adjustment costs make insuring a small loss a cost for both sides that makes no economic sense.

Deductibles lessen the possibility that dishonest people would cause losses if doing so came at no cost to them. Nobody enjoys having to cover a deductible after a loss. But that deductible may save more premium dollars that the amount of the deductible. The one that probably comes to mind first is for a car. Those deductibles of a set number of dollars are called straight deductibles.

There are three other types of deductibles:

1. Aggregate Deductible. adds up all losses until a specific dollar amount is reached. Other losses are then fully compensated for the policy year. In this manner, a company is aware of its annual maximum dollar loss.
2. Franchise Deductible. You pay for a loss below a certain threshold in money. The insurance company pays anything over a certain sum. Ocean marine insurance frequently uses these deductibles. where small losses from dampness, pilferage, and similar perils are common.
3. Disappearing Deductible. lives up to its name; when a loss is significant enough, there is no deductible.