When you have an insurance policy, you may have to foot the bill for some of your medical expenses before your insurance company starts chipping in. This initial amount is your insurance deductible. The size of deductibles can vary depending on the specifics of your plan, and you’ll want to consider the deductible as one of many factors when you’re choosing your health insurance. If you work with a financial advisor, they can advise you about all of your financial needs including insurance.
The Basics of Insurance Deductibles
Your insurance deductible is the amount of money that you’ll have to pay before the insurance company will provide any assistance. So, if you have a $600 deductible for your health insurance, that means you’ll need to pay $600 out of your own pocket for any doctor’s visits, prescriptions, tests or any other medical services before insurance contributions will commence.
Deductibles apply to many different types of insurance, the most notable being health insurance, car insurance and homeowners insurance. We’ll go through details specific to each type in turn. However, the deductible that is likely to impact you the most is health insurance and we’ll explain why below.
Health Insurance Deductibles
Health insurance deductibles will vary in amount depending on the type of insurance plan you have. Typically, plans with a high deductible have lower monthly premiums, while plans with lower deductibles will tend to have higher premiums.
In other words, if you have to spend a lot to reach your deductible, the tradeoff is you pay less in premiums every month. The extreme version of this is the high-deductible health plan (HDHP), which has a deductible of at least $1,350 for an individual and $2,700 for a family. HDHPs also come with access to a health savings account (HSA), which allows you to save up for medical expenses with pre-tax money.
Once you reach your deductible, that’s when cost-sharing measures like copays and coinsurance come into play. Some plans will have copays for certain services that apply before you hit your deductible, but not all.
Homeowners and Car Insurance Deductibles
With a car insurance deductible, your insurance company will typically pay for any repairs necessary after you hit your deductible, provided you have a plan that covers the costs of repairs. The same is true with homeowners insurance. This differs from a health insurance deductible, where you will almost surely have to keep paying at least part of the bill after you hit it.
The calculus for choosing your deductible is slightly different with these two insurance types than with health insurance. With the latter, it’s highly unlikely that you won’t have any medical expenses during the course of the year. Most people that have health insurance are going to use it. With homeowners and car insurance though, that’s not the case. It’s very possible that you go a year without getting in a car accident or your house burning down or getting burglarized.
Choosing Your Health Insurance Deductible
Odds are you’ll have options to choose from when selecting your health insurance plan. Those options will likely have varying deductibles. When making the choice between these options, consider the state of your health.
Is there a good chance you’ll have an annual check-up but not much else? If that’s the case, you may be suited for a plan with a higher deductible and lower premiums. If instead you expect to have one or more procedures during the year or you require expensive medication, you may be better off accepting the higher premiums in exchange for a lower deductible.
Of course, many of your medical expenses will be impossible to predict beforehand. Therefore, you’ll also want to consider how risky you want to be with your deductible. If you have plenty of savings and could handle a few hefty medical bills, you may be more inclined to take the gamble on a high deductible. If you’re stretched thinner, this may not be the case. You may not want to risk opting for the high deductible and then getting hit with a huge bill that’s all your responsibility.
The Bottom Line
Because of deductibles, you’ll still have pay a portion of your medical expenses before you can rely on your insurance company. When you’re considering which insurance plan is right for you, make sure to factor the deductible into your decision. If you have plenty of savings and you’re fine with some risk, you may want to opt for a higher deductible and lower premiums. If you’re more risk averse, you may decide to accept the higher premiums in exchange for a lower deductible.
Tips for Protecting Against Risk
- If you’re not sure how an unexpected medical expense would fit into your finances, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Having an emergency fund in place can help provide a cushion that allows you to choose a higher deductible. You can stash your emergency fund in either a CD ladder or a high-yield savings account.
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