What Is A Deductible In Insurance?

Want to lower your insurance premiums? Deductibles may be your answer.

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Insurance policies are a common practice among Americans in 2020. Everyone we know is availing one or the other kind of insurance policy that provides them protection. There are friends among us whose houses are on mortgages, relatives who have their health insured, cars that are insured and even life insurance policies where a guaranteed death benefit is given to beneficiaries.

Look around and you’ll see almost everyone on at least one type of insurance. All of these people have opted this in the hope to provide them with a financial cushion against unexpected expenses that may befall them.

There is a lot more to insurance policies, including deductibles. These are an excellent way to lower the cost of your insurance policy. Let’s see how.

What Deductible means?

A policyholder is required to pay premiums each month or year to keep the policy in force. Just for however long the duration of the policy is, premiums are to be paid promptly

However, there are three interesting components in insurance:

  • Deductibles
  • Coinsurance
  • Out-of-pocket Maximum

Let’s discuss what these three are and how they come into play with insurance.

A deductible is basically the amount you pay as an extra to the insurance premium. This is the amount set which covers your expenses before the insurance company chips in.

A deductible amount is one of the health insurance components. The amount is set when you’re buying a health plan initially, and you usually start with the deductible amount of $1000 and up. This is the amount you will pay on the medical bills BEFORE the insurance company starts offering you coverage. So if your total medical expense is $1200, you will pay the first $1000 and the insurance company will pay the remaining $200.

The higher your deductible, the lower your premiums. And vice versa. Many people set the lowest deductible possible because having to pay the least amount up front, but that means the monthly premiums are going to be relatively higher.

What is Coinsurance?

Determined by a percentage, this is the amount that you pay AFTER paying the deductible amount. Usually the percentage split is 80/20- meaning that whatever amount is left after paying deductibles, the remaining will be split: 20% will be paid by the insured, and 80% by the insurance company.

What is Out of Pocket Maximum?

Out of pocket maximum is the other component of health insurance, this is basically the maximum amount that you can pay before the insurance coverage kicks in. After the out of pocket reaches its maximum limit, the insurance company takes over all financial expenses of medical bills.

The out of pocket maximum amount does NOT cover premiums- which means no matter how much your deductibles are or how much your out of maximum limit is, you are liable to pay premiums for the time of the policy to keep it in force.

Rates as per 2020, the out-of-pocket maximums are $8,150 for individuals and $16,300 for families. These limits have increased from $7,900 and $15,600, respectively, from 2019.

How do Deductibles work?

Let’s think of it in an equation setting.

Out of pocket maximum = deductibles + coinsurance

Now let’s fit in this equation into a real life example and do the math!

Ethan has an important health surgery which costs him around $10,000. Suppose his deductibles are $2,000 and a coinsurance of 20%.

Out of the $10,000 he will pay $2,000 himself, before his insurance coverage starts. With the remaining $8,000 he will also pay the 20% coinsurance, which will be $1,600. The remaining $6,400 will be paid by his insurance company- if he DIDN’T have out of pocket.

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Let’s see what happens if he does have an out of pocket amount of $2,500.

His annual expenses are capped at $2,500. Now since he has already paid the deductible of $2,000, he will now pay the remaining $1,500 and the insurance company will cover everything else if he HAS out of pocket insurance.

What you have to understand from this example above is that the higher your deductible and out of pocket insurance is, the lower your premiums will be. But if you want a greater chunk to be covered by the insurance company, be prepared to pay very high premiums each month.

In easy words the only difference between deductible and out of pocket maximum is that the deductible is the amount you have to pay before the insurance company jumps in and the out of pocket maximum is when the insurance company pays AFTER you have exhausted your maximum limit.

Types of Deductibles in Insurance

Health insurance deductibles primarily come in two different types: lump-sum and percentage. A lump sum deductible is a fixed amount, like $500 or $1,000- this one is very common for a health insurance or auto insurance policy.

A percentage deductible is equal to a specified percentage of the value of the insured property. Percentage deductibles generally only apply to homeowners policies and are calculated based on a percentage of the home’s insured value. So if your house is insured for $100,000 and your insurance policy has a 2 percent deductible, $2,000 would be deducted from any claim payment.

What is a Deductible in Car Insurance?

A deductible in every type of policy is the same: it is the amount that you pay yourself before the insurance company does.

A deductible in car insurance is the amount you pay for expenses and repairs before your insurance policy covers the rest. Higher the deductible, lower the insurance policy premiums. This is because insurance companies see you as a safe investment: where they will have to chip in less for your expenses.

If you ever get into a car accident, your deductibles will cover the expense first, and the remaining will be covered by the insurance policy. If your deductible is $3000 and the car’s overall expense is $5000, you will pay the $3000 first, and the insurance company will then cover the remaining $2000. So if you have a lower deductible, you will pay a high rate of premiums and vice versa.

Whatever is needed, in terms of repair and damage, will be all covered by the insurance company.

How to lower Car Insurance After an Accident?

No matter how high your deductibles are, if you get into an accident, your car insurance will definitely increase. But there are ways to lower your car insurance premiums after an accident.

If you’ve recently gotten yourself in an accident, you may be in for trouble. Insurance companies charge people higher rates if they have recently been in an accident. But there are still a couple of strategies you can use to lower your insurance premium even after you’ve been in an accident.

Experts advise that the first thing you should do is contact your insurance company and inform them about the accident, no matter how small or minimal. Many people don’t inform their insurance companies in case of accidents, so avoid paying higher premiums. Still, if your company finds out later that you hid important information, they could refuse to honor the policy altogether. To avoid having this issue, make sure you take the company into confidence as soon as even the slightest mishap happens.

By raising your deductible after you’ve been in an accident can help you lower your premiums. Many insurance companies give you the option of raising your deductible mid-policy as well.

An accident forgiveness clause in your insurance policy is a feature where companies tend to ignore the first accident and not raise your premiums. Many companies have understood that accidents are a part of life, and they give drivers an incentive by ignoring their first accident. If the type of policy allows you to have an accident forgiveness clause, you could use it to keep minimum premiums.

Conclusion

Deductibles are an upfront payment on the policy that policyholders may choose to pay. This is sort of an advance that the insured pays in case of an accident or health emergency. The notion is simple: higher the deductible, lower the premium.

Deductible is a fixed sort of amount that covers the expense before the insurance company may chip in. People decide their deductible amount depending upon how much they can afford.

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John Otero

John Otero

John Otero is an industry practitioner with more than 15 years of experience in the insurance industry. He has held various senior management roles both in the insurance companies and insurance brokers during this span of time. He began his insurance career in 2004 as an office assistant at an agency in her hometown of Duluth, MN. He got licensed as a producer while working at that agency and progressed to serve as an office manager. Working in the agency is how he fell in love with the industry. He saw firsthand the good that insurance consumers experienced by having the proper protection. John has diverse experience in corporate & consumer insurance services, across a range of vocations. His specialties include Major Corporate risk management and insurance programs, and Financial Lines He has been instrumental in making his firm as one of the leading organizations in the country in generating sustainable rapid growth of the company while maintaining service excellence to clients.

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