What is a Deductible and How Does It Work?

Most young adults who recently started working or have purchased insurance may have heard the term “deductible.” Many people know that it’s a type of expense that must be paid before insurance benefits begin. However, some people may not understand what it entails exactly. In this blog post, we will explain what a deductible is and how it works.

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Definition of Deductible

A deductible is a set amount of money an insured person must pay before their insurance company starts covering any medical expenses. For example, if an individual has a health insurance policy with a $1,000 deductible and receives a medical bill of $5,000, the insured person must pay the first $1,000, and the insurance company covers the remaining $4,000. The size of the deductible can vary depending on the insurance policy and provider.

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Types of Deductibles

There are different types of deductibles, such as individual, family, and embedded deductibles. Individual deductibles apply to each person on the insurance plan, while a family deductible applies to the entire family coverage. Embedded deductibles are less common and refer to a single person having to cover their own individual deductible before any coverage begins.

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Individual Deductible

An individual deductible is a fixed amount that a single person has to pay before their insurance provider begins to pay for their medical expenses. For instance, if an individual has a $1000 deductible, they have to pay out of pocket for their health care until they reach $1000. After that, their insurance comes into play. Young adults with minimal health problems or injuries should choose low individual deductibles, resulting in lower monthly premiums. But if you have a medical history or frequent health issues, a higher deductible may be more appropriate, with lower monthly premiums. 

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Family Deductible

A family deductible is a preset amount that families have to pay before insurance coverage begins for every family member. If a family has a $3000 deductible and any member of the family meets the $3000 threshold, the insurance kicks in. It's beneficial for young adults with children or spouses to have family deductibles. This approach comes with several advantages, including saving money on overall family insurance costs, easy to manage and track, and the whole family is liable for collectively covering the deductible. If one family member accumulates excess medical expenses, the rest of the family members can contribute to covering the deductible. 

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Embedded Deductibles

Embedded deductibles apply to family policies where a single insured family member meets their individual medical deductible. Once met, that individual's medical expenses are covered by insurance, irrespective of other family members' medical expenses. Embedded deductibles are suitable for families with vast healthcare bills from a single family member, as incurred expenses will be less expensive. However, if a family has frequent medical issues, having a lower individual deductible and high month-to-month premiums can reduce medical expenses for your needs.

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Deductibles and Premiums

The amount of a deductible is directly related to the cost of the insurance policy. Lower deductibles usually mean higher premiums, while higher deductibles usually mean lower premiums. This means that a person can choose to have a low deductible with high monthly premiums, or a high deductible with low premiums.

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Deductibles and Out-of-Pocket Expenses

Deductibles are directly related to another out-of-pocket expense known as co-insurance. Co-insurance is the cost-sharing between the insured person and the insurance company for covered services. After the deductible is met, the insured person is responsible for paying a portion of medical bills until they reach their out-of-pocket maximum. The out-of-pocket maximum is the upper limit of how much an individual must pay out of their own pocket. Once this maximum is met, the insurance company will pay the full cost of medical bills for the rest of the year.

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In summary, a deductible is a predefined amount that an insured person must pay before insurance coverage begins. It is a standard feature in many insurance policies, including health, home, and auto insurance. There are different types of deductibles, and their amount determines the cost of a policy’s monthly premium. Deductibles are directly tied to out-of-pocket expenses and co-insurance, which determine the amount an individual must pay after meeting the deductible and before reaching their out-of-pocket maximum. Understanding how a deductible works is an essential step in selecting the right insurance policy for one's needs and budget.

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