What is a Deductible?

Insurance is a complex topic. Whether you’re looking at health insurance plans, comparing homeowner’s insurance packages or looking for a deal on auto insurance, the details are enough to make your head spin.

One important factor to pay attention to is the deductible. What is a deductible, exactly, and why does it matter for your finances?

What is a deductible? 

A deductible is an amount you pay before your insurance coverage will pay your claims. 

For example, if you have a $1,000 deductible on your health insurance plan, you’ll pay the first $1,000 of healthcare costs out of pocket. The deductible resets every year. 

After you pay the full amount of the deductible, your insurance benefits kick in. There will typically be a copay or coinsurance amount that you must cover, but in general, insurance pays for most of the expense once the deductible is met. 

Deductibles are most commonly thought of in health insurance, but almost all types of insurance have some sort of deductible; health, homeowner’s, automotive, and even travel insurance all have deductibles that must be met. 

Insurance deductible example

Raj has a health insurance plan with a $200 monthly premium and a $1,000 deductible. He’ll pay $200 per month, regardless of how much he uses his health insurance. 

Raj has an accident playing sports and goes to the emergency room. Afterward, he receives a bill for $2,200. 

Because Raj’s deductible is $1,000, his insurance company will require him to pay the first $1,000 of that $2,200 bill. Raj’s insurance company will pay for the remaining $1,200 (unless there’s also an ER visit copay or coinsurance, which could be a flat fee or a percentage of the cost). 

Note: Insurance plans are complex, so examine the details of your plan closely. This is a simplified example. 

What does the deductible apply to?

You’ll need to check your insurance plan’s details to see what the deductible does and doesn’t apply to. 

In many plans, the deductible applies to most expenses. So whether you’re seeing a dermatologist or visiting the emergency room, the deductible will likely still apply.

However, many plans have exceptions for preventative care. For example, a wellness visit at your family doctor may be deductible-free. All marketplace healthcare plans cover certain preventive services without requiring your deductible to be met first.

If the deductible doesn’t apply, your insurance benefits kick in right away. You may still owe coinsurance or a copay, but you won’t have to cover the full cost. 

Some plans may state separate deductibles for different services. For example, a health plan may have a standard deductible and a completely separate prescription medication deductible. 

For insurance plans other than health insurance, details vary. Most automotive and homeowner’s insurance plans have a deductible that applies to everything; others may be more flexible. Check your plan details to learn more. 

High deductible vs. low deductible insurance plans

Insurance plans are priced based on a combination of the benefits available and the deductible amount. The monthly cost of an insurance plan is referred to as the “premium.”

Generally speaking, a plan with a higher deductible will have a lower monthly premium. 

This makes sense since the higher the deductible, the lower the cost of care that the insurance plan will have to cover. So, the insurance company can offer the plan at a lower cost. 

For example, consider these two plans:

• Gold plan with a $500 deductible = $475 per month

• Bronze plan with a $6,500 deductible = $275 per month

In this case, the gold plan costs nearly twice as much per month, but the deductible is far lower. 

Weighing the pros and cons of each plan is complex and highly individualized. It depends on the benefits of each plan, family makeup (families with kids probably need health care more often), how often you use the coverage and other factors. 

If you don’t expect to use your plan very often, it may make sense to choose a high deductible health plan (HDHP). That way, you’ll get a much lower monthly payment and you’ll still have catastrophic coverage should something serious happen. Plus, remember that most plans cover certain preventative visits 100% without requiring the deductible to be met first. 

The downside is, of course, that you’ll pay far more out of pocket if you end up using your plan a lot. With the bronze plan described above, a $10,000 surgery would max out your deductible and cost you at least $6,500 out of pocket. Consider your healthcare budget when deciding on a deductible you can live with. 

How to learn more about your health insurance plan

Insurance is complicated and each plan is different. The basic concept of what is a deductible is true for all plans, but details vary. 

It’s important to dig into your plan’s details so that you fully understand your coverage. 

Employer coverage: If you get insurance through work, talk to the human resources (HR) department for plan details. They should be able to give you a printout of plan benefits, as well as help you understand how they work. 

Existing insurance: If you already have insurance, call your insurance agent for details. You can also find plan documents online. 

Shopping for new insurance: If you’re looking around for a new insurance plan, pay close attention to the plan’s details, benefits and deductibles. A cheap plan may look attractive, but if it has a sky-high deductible, it might not be best for your situation and budget.

Wrapping up

The deductible is simply the amount you pay out of pocket before your insurance plan starts covering expenses. It applies to almost all types of insurance. 

Knowing your deductible ahead of time can help avoid costly visits that you aren’t prepared for. If you do go over budget, know that you may be able to negotiate health care bills. 

Finally, try to avoid putting any medical expenses on a credit card unless it’s absolutely necessary. Credit card debt can be a costly burden. 

If you have existing credit card debt, Tally† is well worth looking into. Tally helps qualifying Americans consolidate credit card balances to pay them off faster. 

†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.