What Is a Deductible & How Does It Work?

KEY TAKEAWAYS

• A deductible is what you have to pay before your insurance kicks in and covers the rest.
• Deductibles vary based on your insurance policy.
• Deductibles are either set to a fixed amount or based on a percentage.
• Some insurance plans have separate deductibles. Others have only one deductible.
• Deductibles can range from a couple hundred dollars to several thousand.

What is a Deductible?

A deductible is the amount of money you agree to pay for certain expenses before your insurance company begins to cover costs. Thus, if you have a $500 deductible and your annual car insurance premium is $800, you will pay $500 every year until you meet that threshold.

Once you do, the remainder of the car insurance premium cost is covered. The amount is in your car insurance policy. The amount that you agree to pay as a deductible is one of the factors that will determine how much you will pay for your car insurance policy each year.

Other factors include your driving history, length of time you’ve had your license, and the make and model of the car you drive.

What Are The Types Of Deductibles?

There are many types of deductibles available for you to choose from when adding a car to your policy. Here are some of the most common types of deductibles:

Collision: Collision damage coverage is also referred to as physical damage coverage. This is your insurance company paying for the damage to your car if you are at fault in an accident.  

Whether you’re in a fender bender or there’s considerable damage, you need coverage. Uninsured motorist property damage is expensive. And it can cost you your license, especially if you’re the driver at fault.

Comprehensive: Comprehensive coverage is also referred to as non-physical damage coverage. This is your insurance company paying for damage to your car regardless of who caused it.

Medical: Medical coverage is also referred to as personal injury protection. This is an amount of money the insurance company will pay for any medical bills you incur as a result of an accident. 

How Do Deductibles Work?

Deductibles are the amount of money you have to pay for a covered medical expense before your insurance company starts to pay its share. For example, let’s say you have a $1,000 deductible and you go to the hospital for an appendectomy that costs $5,000. You would be responsible for paying the first $1,000 of the bill. Your insurance company would pay the remaining $4,000 of the covered claim.

It’s important to remember that your deductible is not the same as your out-of-pocket maximum. Your out-of-pocket maximum is the most you’ll have to pay for covered medical expenses in a year. It includes your deductible, as well as any coinsurance or copayments you might owe. Once you reach your out-of-pocket maximum, your insurance company will pay 100% of the costs for covered services.

There are also deductibles for auto insurance policies. Just as with health insurance, the auto insurance deductible is what you pay out of pocket. 

Suppose you have a $500 deductible and you get into an accident that causes $5,000 in damage to your car. You would be responsible for paying the first $500 of the repair bill, and your insurance company would pay the remaining $4,500.

Deductibles can vary depending on the type of coverage you have. For example, collision coverage typically has a higher deductible than comprehensive coverage. That’s because collision coverage covers damage caused by accidents. Comprehensive coverage covers a wider range of risks, such as theft, vandalism, and natural disasters.

How Is A Deductible Determined?

The type of car you drive, your age, and your driving history will all affect the deductible you are offered. If you select a policy with a higher deductible, you will likely pay less per month. If you select a policy with a lower deductible, expect to pay more per month.

Deductibles are usually a fixed amount, but they can also be based on a percentage of the cost of the covered service. For example, let’s say you have health insurance coverage with a $500 deductible and you go to the hospital for a surgery that costs $5,000. If your deductible is fixed, you would owe $500. But if your deductible is 10%, you would owe $500 + 10% of $5,000, or $600.

Deductibles can also vary depending on the type of service. Some plans have a separate deductible for outpatient services. Others have a single deductible that applies to all services.

Some plans also have a family deductible. This is the total amount that all family members would have to pay out of pocket before the health insurance issuer would start to pay its share. For example, let’s assume you have health insurance coverage with a $1,000 family deductible, and your spouse goes to the doctor for a routine check-up.

If your spouse’s visit costs $100, you would not have to pay anything because the cost is below the deductible. But if your spouse needed surgery that cost $5,000, you would be responsible for paying the first $1,000 of the bill.

Does A Deductible Affect The Cost Of Insurance?

Yes! If you have a lower deductible, you will pay more for your car insurance. If you have a higher deductible, you will pay less for your car insurance. This is because a deductible is used to determine the amount your annual premium will be.

The higher your deductible, the lower your premium will be. The lower your deductible, the higher your premium will be. A deductible is one of the factors that will affect the price of your car insurance policy.

Summary

A deductible is the amount you have to pay out of pocket before your insurance company will start to pay its share. Deductibles can vary widely, from a few hundred dollars to a few thousand dollars.

And they’re not always straightforward. Some plans have separate deductibles for different types of services. I.E., inpatient care, outpatient care, or prescriptions. Others have a single deductible that applies to all services.