Here’s an article I wrote for Learn & Grow. It was a fun challenge to try to explain something so complex in an understandable way.
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For decades, one question has boggled the minds and glazed the eyes of Americans everywhere: “What is a deductible?” Today we’ll answer this age-old query, breaking it down in a simple, everyday way—and clarifying some other related terms while we’re at it. Ready? Let’s do this.
First, what a deductible is… and isn’t
Ironically, the best way to explain what a deductible is, is by explaining what it isn’t: namely, a premium. With health insurance, a premium is the amount that’s taken out of your paycheck each month—you may have seen it listed on your paystub under something like “Health Plan.”
But your premium doesn’t cover all your health care costs. No, no, no. You still have to pay “out of pocket” (or checking account) for doctor’s visits, hospital stays and any other covered care... up to a certain amount. To be crystal clear, your insurance pays NOTHING. This extra cash you shell out on your own—IN ADDITION TO YOUR PREMIUM—is called your deductible.
Say, for example, you signed up for an insurance plan with a $3,000 deductible. That means, in the next 12 months, you have to pay $3K of your own money (no insurance help) before you “meet” (or pay off) your deductible.
Another way it could work: suppose you had a procedure that cost $10,000. If your deductible was $2,500, you’d pay that chunk of the bill ($2.5K) and your insurance company would snatch up the remaining $7,500.
What’s an “out-of-pocket max?”
As its name implies, it’s the most you have to pay out of pocket in a “plan year” (the first 12 months after you sign up for a health plan). Once you hit that amount, your insurance company covers 100% of your out-of-pocket expenses until the next open enrollment, though, and this is important: YOU’LL STILL KEEP PAYING YOUR PREMIUM (that pesky paycheck deduction).
How do premiums and deductibles work together?
Premiums and deductibles are like two friends at recess, playing on a teeter-totter. When one goes up, the other goes down. In other words, if you choose a health care plan with a high premium, you’ll have a low deductible. Or if you pick a plan with a low premium, you’ll have a high deductible.
The reason? With a low deductible, the insurance company takes on more of the risk, so you pay a higher premium. With a high deductible, you take on more of the risk, thus you pay a lower premium.
Should I choose a high- or low-deductible plan?
Like so many things in life, it depends. Some folks like the seemingly warm fuzzy blanket of security that comes with a low deductible (more protection from potentially crushing out-of-pocket costs); others opt for the potential savings of a high deductible (bigger paychecks and more money in the ol’ checking account).
Do you have a condition that requires constant care? Well, then a low-deductible might be the way to go. On the other hand, if your health is relatively robust, a high deductible could be ideal. Give it some thought, ask around and see what coverage works best for you and your family.
What’s a “copay?”
Once you’ve met your deductible, you start paying a “fixed amount” (or flat fee) at the doctor’s—instead of footing the whole bill. Why? Because your insurance company starts paying a sizeable chunk, hence the name “copay.”
Here’s how it works: pretend you sprained your ankle playing backyard badminton with a few choice chums. Before you leave the doctor’s office, you’d pay the $20 copay (or whatever your insurance charges) and be on your merry way. That’s all you owe.
You may be wondering, “Where do I find the copay my insurance company charges?” That’s an easy one. They should be smack dab on your health insurance card. There, you’ll see different amounts for a regular doctor (“general practitioner”), a “specialist,” (like an eye doc) or a trip to the ER. You’ll also see copays for different types of prescriptions.
As a friendly reminder, once you reach your out-of-pocket max, your insurance company covers 100% out-of-pocket costs until the end of the plan year—and the copay goes away. Sayonara.
Why deductibles?
The main point of insurance is protecting you from forking out massive amounts of moolah due to a catastrophic event. If your insurance company covered every little proverbial hangnail, it would make this larger purpose impossible—that’s where the deductible comes in.
Another reason insurance companies charge a deductible? To give you some skin in the game. Their reasoning goes something like this: knowing you’ll be paying for some of the costs yourself might make you more apt to stay on top of your health and save everyone some coin in the process. Nice.
Still hankering for more about deductibles? Give these handy articles a try.
Why do insurance companies have deductibles? - Investopedia
Understanding your insurance deductibles - Insurance Information Institute
Why so many people choose the wrong health plans - New York Times