Buying insurance coverage helps keep you protected from the full financial fallout of an accident or injury (phew!). But (and it’s a big but) even with insurance, you’ll probably still be responsible for some costs when you file a claim.
An insurance deductible is the amount of money the insured party is responsible for at the time of loss or damage: it’s the cost you have to pay before the insurance company pays out its share.
Here’s what you need to know about the different types of insurance deductibles and other insurance-related costs you may face.
What is a Deductible?
When you buy insurance, you’ll encounter several different figures depending on the type of coverage you’re purchasing. These may include monthly premiums, copays, out-of-pocket maximums, and possibly others.
The vast majority of insurance policies, whether they’re auto, health, or homeowners, carry a deductible. So what is a deductible, and how does it work?
The deductible is a sum of money you, as the insured party, are expected to pay toward a loss. Another way to think about it: It’s the amount the insurance company deducts from the total claim and asks you to pay.
For instance, say you get into a car accident in which you sustain $8,000 worth of damage and you have a $1,000 deductible. When you file your claim, you’ll pay $1,000 toward repairs and the insurance company will cover the remaining $7,000 (or up to whatever limits are laid out in your insurance contract).
Your deductible can be a fixed dollar amount or a percentage, depending on your individual plan as well as what kind of insurance policy you’re talking about. Homeowners insurance, for instance, is commonly offered with deductibles calculated as a percentage of the property’s total insured value.
It’s important to understand that your deductible is separate from your premium, which is the amount of money you pay each month in order to keep your insurance policy active.
And it’s equally key to remember that you may also be responsible for other insurance-related expenses, like copays or coinsurance. Always be sure to read the fine print carefully!
Copay vs. Deductible
With certain types of insurance—primarily health insurance products—you may be required to pay a copay each time you go to the doctor’s office or receive a covered service. This copay is separate from your deductible, and, generally, your copay doesn’t count toward your deductible amount.
As with other types of insurance, the health insurance deductible must be paid by the insured person before the insurance company begins its coverage. However, health plans may include certain services, such as regular check-ups, that are covered even before the deductible is paid in full.
Here’s an example. Say you twist your ankle and visit your doctor, who orders an MRI. If your copay is $25, you’ll pay $25 at the office before or after you see your physician. If the total cost of the doctor’s care and imaging services is $1,000 and you have a $500 deductible, you may still be responsible for the full $500. Any copays you’ve forked over along the way won’t be subtracted from your deductible.
Some plans may carry a coinsurance cost rather than a copay: The two are similar, but not identical. Coinsurance is an amount you pay when you receive a medical service, separate from your deductible. However, copays are charged at a fixed dollar amount, whereas coinsurance is calculated as a percentage of the total cost of the service. Your plan might even include both copays and coinsurance costs.
All insurance policies are different, and your individual costs and experience may vary depending on the services you’ve received and the specific coverage you have. You can consult your own insurance paperwork or contact a customer service representative for full details on what’s covered in your plan.
Out-of-Pocket Maximums
Health insurance policies in particular are subject to federally mandated out-of-pocket maximums. This is the highest total dollar amount you’ll have to pay toward covered healthcare over the course of a single year, including both deductibles and copays.
The out-of-pocket maximum does not include the amount you pay toward your monthly premium, however. Nor does it include out-of-network services or services that your plan expressly does not cover.
For 2021, the out-of-pocket maximum for a Marketplace plan can’t be more than $8,550 for an individual or $17,100 for a family. (The maximum is allowed to be lower, however, so consult your plan paperwork for full details.)
Do You Want a High or Low Deductible?
When shopping for insurance coverage, you’ll likely have a range of options to consider, including a spectrum of deductible costs. And when it comes to figuring out whether you want a high or low deductible, the answer is: It depends.
Generally speaking, the size of the deductible is inversely proportional to the policy’s monthly premium. Typically, the lower your deductible, the higher your premium will be and vice-versa.
This makes sense, when you think about it from the insurance company’s perspective. If you have a low deductible, it’ll have to pay out a higher amount when you incur a loss. So in exchange for the promise of covering most of the costs when a claim is filed, the company expects you to pay more up front in the form of a higher premium.
While choosing a higher deductible can help you save money over time since your monthly premiums will be lower, it also means you’re assuming more risk. If something happens and costs are incurred, you’ll be responsible for a larger share of those expenses.
On the other hand, choosing a lower deductible means you’ll spend more each month. But you’ll also have less to worry about if you do need to file a claim, since the insurance company will cover more of the costs (assuming that all the damages and expenses are ones that are covered under your policy).
As with so many other financial matters, what’s right for you comes down to your own risk tolerance and aversion, as well as how much you can afford to spend upfront or if there’s an accident. Specific lifestyle factors might also affect your decision. If you participate in extreme sports, for instance, and you’re at risk for catastrophic injuries, you might want to pick a health insurance policy with a lower deductible and higher premiums. And you may decide to choose higher deductibles on certain types of insurance policies and lower deductibles on others, depending on which types of damage you feel you’re more likely to incur.
Zero-Deductible Insurance: Is It a Thing?
You may see zero-deductible insurance policies advertised and wonder if they’re too good to be true. While zero-deductible insurance policies do exist, they usually carry higher premiums than policies that do carry deductibles, and you may also be responsible for a one-time no-deductible fee or waiver.
Furthermore, some insurance coverages are required by state law to carry a minimum deductible, particularly when it comes to auto insurance.
So, once again: always be sure to read the insurance contract in full and ensure you understand exactly what costs you’re responsible for before signing up for any kind of insurance coverage.
Types of Deductibles
While there are many, many different types of insurance policies with deductibles on the market, common insurance deductibles include:
• Health insurance deductibles
• Auto insurance deductibles
• Homeowners insurance deductibles
• Renters insurance deductibles
• Life insurance deductibles
The amount of these deductibles varies by type of insurance, company, and plan, among other factors.
The Takeaway
Purchasing insurance is an important—and sometimes legally mandated—step toward protecting yourself from the high costs of personal accidents and property damages. However, with most insurance policies, the insured party is still responsible for a portion of the cost of a claim. That portion is known as the deductible (which is separate from any copays or coinsurances). Understanding deductibles and how they relate to other aspects of your insurance policy can help you opt for the choice that will make the most sense for your life and finances.
SoFi has partnered with a number of highly regarded insurance providers to help our members find the protection they need at the lowest possible prices.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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