What Is An Insurance Deductible?

What Is A Health Insurance Deductible? Definition

When buying a health insurance policy, many shoppers wonder: what is an insurance deductible? 

Before your insurance company starts paying for a covered healthcare service, you have to first pay up to the deductible out of pocket (i.e. by yourself). After you’ve reached your deductible amount, your insurer will start covering a large portion of the rest. 

How Health Insurance Deductibles Work

Health insurance deductibles are a bit more complicated than other kinds of insurance deductibles. 

When looking at a health insurance policy, each plan comes with a deductible. 

If you have a $3,000 deductible, it means you need to pay $3,000 for a claim before your insurance coverage kicks in. 

After you have paid your deductible, you only need to pay coinsurance or copayment, though there are some exceptions. Your insurance company will cover the rest of the payment. 

Deductibles apply to a year of health insurance coverage. This means that the amount you’ve paid going towards meeting your deductible will be reset to $0 every year, usually on January 1st. 

If you don’t end up using your health insurance, you will still have to continue paying your premium so long as you have the policy active. However, you won’t have to be paying your deductible continuously because unlike the premium, it is not a recurring monthly payment. 

How does coinsurance or copayment work?

Coinsurance is how much of the medical expenses you need to still pay once the deductible has been reached. The typical coinsurance you need to pay ranges between 20% and 40%. The values and percentages might also vary if you use an in network service as opposed to out of network. 

A copayment is a fixed amount of money that you pay. This copay value doesn’t go towards meeting your deductible. 

What is the out of pocket maximum? 

The Affordable Care Act (ACA) places a maximum limit on the amount of money someone insured can pay out of pocket in a year for healthcare services. This applies to policies within the health insurance marketplace. 

Policies outside the insurance marketplace may not have the same yearly out of pocket limit. 

Types Of Insurance Deductibles

Health insurance deductibles come in different categories. Family or individual, and high or low are the most common ways to classify the different types of insurance deductibles. 

Family deductible vs individual deductible 

Individual deductible is the amount a single insured person needs to pay before insurance kicks in and they only need to pay coinsurance. 

The family deductible works the same except instead of for a single insured person, it’s for the entire family under the policy. 

For everyone on a family health plan, the family deductible can be reached even if individual members have not met their individual deductibles. 

High deductible vs low deductible 

A high deductible is generally viewed as high when relative to a lower deductible version of an insurance company’s policy. Many insurance policies for healthcare services will come in levels of Bronze, Silver, Gold, etc. and each policy might have a different deductible amount. 

A high deductible means you will probably need to pay less for your premium, but more out of pocket before your insurer will cover a claim. 

What To Consider Before Choosing An Insurance Deductible

The costs 

One of the most important factors to consider is the insurance cost. You want a healthcare plan that is relatively affordable, and choosing a higher deductible plan may be able to help you reduce the monthly drain on your finances. 

Yet at the same time, a higher deductible means that insurance won’t cover your claim until you reach it. This means that if you do end up needing health care services that are fairly expensive, but less than your deductible, you will need to pay more by yourself first before any coverage kicks in.

Generally speaking, it is advisable to find a deductible that is reasonably balanced. That way, your monthly premium isn’t too costly, and the deductible is a dollar value that you are willing to pay in case of medical expenses. 

What are your healthcare needs?

Are you young and healthy, or do you have special medical conditions that may need more frequent or expensive care? 

If you find yourself having the need to pay high medical costs for specialized care, visits, or drugs, it might be a good idea to get a plan with a lower deductible, since those plans often offer more coverage. 

Average Deductibles and High-Deductible Health Plans

A plan with an average deductible will have a higher premium cost than a high deductible health plan (HDHP). 

It’s important to note that a high deductible health plan also enables you to open up a tax-advantaged health savings account. 

Many insured people have opted into high deductible health plans even though they are not taking full advantage of the potential tax benefits. If you’re interested in an HDHP, it’s a good idea to be aware of how a tax-advantaged health savings account can work for your benefit. 

FAQ

Why does health insurance have deductibles? 

Insurance companies have deductibles to help keep policyholders from acting in bad faith. When someone is insured, they may become more likely to engage in risky behavior because they know they have insurance coverage. 

Deductibles mitigate this risk because the policyholder has to pay out of pocket first, thus reducing any overreliance on insurance. 

The second reason deductibles are applied is so that there is more financial stability for the insurance company. If there is a catastrophic claim, which is what many policyholders worry about, the healthcare expenses can be extremely high. 

Deductibles provide a cushion between minor claims and catastrophic ones so the insurance company can afford the large claims 

Is it better to have a high or low deductible?

This entirely depends on your preferences and budget. Typically, the higher the deductible, the lower your premium. If you don’t want to pay a lot every month and are willing to pay more upfront if you do need healthcare services, then it may be better to have a higher deductible.

This way, coverage will be available if you need to pay a lot of medical expenses for an unexpected reason, but you won’t have to break the bank for the monthly premium. 

If you have any chronic condition or are expecting numerous doctor visits, having a lower deductible might be more advantageous since you’ll meet your deductible sooner. 

Low deductible plans are also sometimes better for larger families because they can more quickly reach the family deductible as well. 

After I meet my deductible, do I still have to pay?

After reaching your deductible through making out of pocket payments, you may still be responsible for a coinsurance, which is the amount you still have to pay even though your policy will cover the rest. 

However, once you reach your out of pocket maximum for the year, you won’t have to pay anymore. 

Do copays count towards deductibles?

The general rule applied to copays and deductibles is that copays do not apply to deductibles. A plan that is APA compliant though is required to credit any copays you make to your out of pocket maximum. 

Do most people meet their health insurance deductible? 

Many people don’t reach their health insurance deductible within a year. However, when they do, health insurance coverage often provides much needed financial support. 

When does the deductible reset? 

Most policies will follow a calendar yearly schedule for the deductible. Your deductible will likely reset on the 1st of January each year.

How much is a deductible for health insurance? 

Deductibles can vary greatly depending on your provider, policy, and other factors. They can go for anything from a few hundred to thousands of dollars. 

What is a zero deductible insurance policy? 

For some people, an expensive zero deductible plan (AKA no-deductible health insurance) might be the optimal choice because ongoing medical treatment is expected and necessary. 

Zero deductible plans usually have significantly higher premiums you need to pay each month. But they can help you save money over the course of a year or several years based on what healthcare services you need. 

A big benefit to getting a no-deductible health insurance policy is that it helps make insurance costs a lot more predictable. You’ll know exactly how much you need to pay for coverage each year.  

What are the advantages of high-deductible health plans?

If you choose a high deductible health plan, it will typically have a lower premium. This means you don’t have to pay as much every payment cycle (usually a month). 

With a high deductible health plan, you also may become eligible to open a tax-advantaged health savings account, which is a savings account that offers certain tax benefits. 

Does Medicare coverage come with deductibles?

Yes. Like other insurance policies, Medicare coverage comes with deductibles. 

Here are some example deductible values for the year 2023. 

• Medicare Part A - $1,600 for inpatient hospital stay 
• Medicare Part B - $226 for outpatient services 
• Medicare Part D - Less than $505 for prescription drugs, varies depending on the plan 

Does the deductible always need to be paid before the insurer covers healthcare costs? 

Some policies do have exceptions for which you don’t need to pay the deductible first. 

For example, a catastrophic health insurance plan might offer coverage for multiple primary care visits a year before you need to start working towards meeting your deductible.