Deductible vs. Out-of-Pocket Max

What’s the difference between a deductible and an out-of-pocket limit?

Your insurance deductible is relevant at the beginning of your health insurance policy, and your out-of-pocket maximum is relevant after you’ve had significant health care during a policy year.

Deductible: You pay 100% of your health care costs until your spending totals your deductible amount. Coinsurance/copay: You’ll pay a portion of your health care costs until your total spending reaches your out-of-pocket limit. Out-of-pocket limit: You’ll pay 0% for covered health services after your out-of-pocket limit.

What does annual deductible mean?

A health insurance deductible is the amount of money you pay out of pocket for health care services before your insurance plan starts contributing to the cost.

For example, if your deductible is $1,000, you’ll pay in full for the first $1,000 of your health care. Your insurer will keep a running total of how much you pay, and when you hit $1,000, the cost-sharing benefits of your health insurance plan begin. This could mean, for example, that instead of paying the full price of $250 for an X-ray, you could pay $50, and the insurance company will pay $200.

In health insurance, the deductible works on an annual basis, and after your new policy year begins, the running total of what you’ve paid will reset to zero. This could mean that your health care costs will be higher in the first part of the calendar year until you hit your deductible amount. Then for the rest of the year, you’ll get the cost-sharing benefits of your insurance plan, and you’ll pay less for covered health care services.

What does out-of-pocket maximum mean?

An out-of-pocket maximum is a cap on what you’ll have to pay for covered health care services in a year.

For example, if your out-of-pocket max is $3,000, the amount you pay for your deductible, copayments and coinsurance will be added together, and when the running total reaches $3,000, your health insurance company will start to pay the full cost for all covered health care services.

Your out-of-pocket limit also works on an annual basis, and the total resets to zero in the new policy year. Your out-of-pocket max helps protect you from a worst-case scenario where you need significant medical care. After your expenditures reach this limit, you won’t have any out-of-pocket costs for additional treatments and services that are covered by your policy.

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What factors should you consider when choosing a deductible?

1. Could you afford a higher deductible in the case of an incident?

What does your emergency fund look like? If you have a $1,000 deductible, you would then have to pay that $1,000 in the case of a claim.

Could you pay that money out of pocket in order to repair your car? If the answer is no, you’ll want a lower deductible to ensure you are not left without in a bind to repair your automobile. If you have that money on hand at any point, it might be worth opting for a higher deductible.

2. What is the payback?

Do the math with your insurance agent. How much would you save on a lower premium if you had a higher deductible? Would you save money that would equate to that deductible in the case of an incident?

For example, lets say that changing from a $500 to $1,000 deductible would save you 10% on your annual premium. Your annual premium for the $500 deductible would have been $800, but with the $1,000 deductible the premium is instead $720.

Now you have an increased deductible by $500, but you are saving $80 per year. That means you would need just over 6 years in order to make up the difference. If you don’t get into an accident in those 6 years, the increased deductible was worth it. If not, you have to pay more out of pocket.

This is a basic form of the math. Working with an insurance advisor will take your other deductible variables into account as well and help you arrive at a better decision. Call (844) 819-2221 to speak with one of our advisors.

3. How often do you have accidents?

If you have a lot of accidents and claims, you’ll want a lower deductible. This means you’ll have to pay out less each time you have a claim.

If you have a good driving record, a higher deductible could work in your favor. You’ll save money on the premiums, which you could use towards your deductible in the case of a claim. For example, a driver who hasn’t had an accident in 20 years might not be scared by the above example of the 6-year time period to make up the difference. They might opt for a higher deductible because they feel they have a lower risk of collision.

4. How risk averse are you?

Ultimately, a higher deductible is a higher risk. The lower your deductible, the more coverage and security you have. How much are you and your family willing to risk?

5. What is the value of your vehicle?

Expensive vehicles cost more to insure. In this case, a high deductible might make sense because you would have higher savings on your premiums.

On less valuable cars, you may not want a high deductible because the cost to repair damage might not equate to your deductible. For example, if you have a $1,000 deductible and your used car needs a total repair of only $600, you would pay that entire amount out of pocket. Your insurance wouldn’t pay for anything.

Additionally, a lower value car will have a lower cost of insurance. In this way, the price difference between a $500 deductible and $1,000 deductible wouldn’t offer significant premium savings.

6. Are you leasing or financing your car?

People who are leasing or financing their car tend to choose a lower deductible. This provides better coverage in the case of a claim. This is necessary for people who don’t own their car, because they are responsible for returning the car in working condition no matter what—with or without the financial help of insurance.

7. Can you mix and match deductibles? 

If you’re a good driver, you might be able to offset costs by having a high deductible for collision and low deductible for comprehensive. This ensures a high line of coverage for unexpected incidents and “acts of God” under your comprehensive coverage. Plus, comprehensive is usually a cheaper coverage policy.

You would offset the raised comprehensive premium cost by holding a higher deductible for collision insurance. Collision policies cover those costs if your vehicle hits a car or other car. If you don’t get in a lot of accidents, you can take the risk with a higher deductible.

Nevertheless, to keep it simple, you may want to hold the same deductible for all types of coverage and cars.

How deductibles work

For dollar amount deductibles, a specific amount would come off the top of your claim payment.

For example, if your policy states a $500 deductible, and your insurer has determined that you have an insured loss worth $10,000, you would receive a claims check for $9,500.

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. In the event of the $10,000 insurance loss, you would be paid $8,000. In the event of a $25,000 loss, your claim check would be $23,000.

Note that with auto insurance or a homeowners policy, the deductible applies each time you file a claim. The one major exception to this is in Florida, where hurricane deductibles specifically are applied per season rather than for each storm.

Deductibles generally apply to property damage, not to the liability portion of homeowners or auto insurance policies. To use a a homeowners policy example, a deductible would apply to property damaged in a rogue outdoor grill fire, but there would be no deductible against the liability portion of the policy if a burned guest made a medical claim or sued.

 

How does a car insurance deductible work?

Conventional automobile insurance policies generally require the consumer to select one deductible for comprehensive coverage, and a separate deductible for collision coverage, although they may be the same deductible amount. The liability coverage in the policy does not involve a deductible.

Comprehensive coverage protects your vehicle from theft and damage not caused by a collision. The deductible on your policy will apply if you file a claim for damage covered by comprehensive, however there are some instances in which you don’t have to pay a comprehensive deductible. For example, cracks or chips in your windshield may be paid in full by your insurance company depending on the state you live in.

Collision coverage pays the costs of any damage to your vehicle caused by a collision with an object when you are at-fault. Any claim you file for damage that is covered by collision will be subject to a collision deductible.1

The higher a deductible, the lower the annual, biannual or monthly insurance premiums may be because the consumer is assuming a portion of the total cost of a claim. Keep in mind that the deductible amount will come out of the policyholder’s pocket in the event of an at-fault car accident, which could overshadow the premium savings.

Conversely, a low deductible will increase the premium payments. If the policyholder does not have an at-fault accident resulting in a claim, the individual has paid more for automobile insurance than someone with a higher deductible.

What is the average car insurance deductible?

Generally, many drivers carry policies with $500 comprehensive and collision deductibles, but there are usually other levels available. Most companies offer options for $250, $500, $1,000 or $2,000 deductibles. Some auto insurance companies offer different options for deductibles, including a $0 or $100 deductible. Your comprehensive and collision coverages do not have to match, either; it is not uncommon to have a $100 comprehensive deductible but a $500 collision deductible, or a $500 comprehensive deductible and $1,000 collision deductible.

What you end up with will depend on how much you have budgeted to spend on car insurance each month and how much you can afford to pay out of pocket if you end up needing repairs. Generally, the lower the deductible, the higher your insurance premium. It is important to consider your overall financial health when choosing a deductible.

How Do Health Insurance Deductibles Work?

It’s vital to know how your health policy works—you do not want to risk your health because you chose a health plan with too high a deductible.

Deductibles are part of health insurance plans also. If you have a $1,000 deductible, you'll pay the first $1,000 of the cost of your care. Once you pay it, you typically only have to pay coinsurance or a co-payment when seeing the doctor.

With some policies, there are certain services, such as check-ups or disease-management programs, where you won't need to pay. That's why it's a good idea to check with your insurer and see whether that applies to your plan.

When are you not required to pay your car insurance deductible?

There will be occasions when you are not required to pay your deductible, but those are few and far between. In general, you will not be required to pay your deductible when:

Another driver is at fault

If another driver is at fault for hitting you and they are insured, you should not be responsible for paying a deductible on the claim that you file through their insurance company. Your deductibles only apply when filing a claim with your insurer.

If you have a diminishing deductible

Some insurance companies offer a diminishing deductible, or vanishing deductible, option. If you have this policy feature, the longer you go without an accident results in a reduction in the amount you would have to pay for your deductible. Usually, it is a $100 credit applied towards your deductible amount each year you are accident-free. So, for example, if you have a $500 collision deductible and do not have an accident for four years, you could receive a $100 reduction every year. Then, if you needed to file a claim, your deductible would be $100 instead of the original $500. Once you use your diminishing deductible, there is usually a time period to qualify for it again. Speak with your insurance agent or carrier representative to see if this feature is available and their criteria.

Choosing the best health insurance policy

The deductible and out-of-pocket max are two very important factors when deciding which health insurance plan is right for your needs.

In general, you’ll pay more each month to get better cost-sharing benefits, such as lower deductibles, lower out-of-pocket maximums, and lower copayments or coinsurance. These higher monthly costs may be worth it if you’re expecting to need significant medical care in the upcoming year.

Choosing a plan with lower monthly payments can be good for those who are young and healthy, but it means higher deductibles, higher out-of-pocket maximums, and paying higher copayments or coinsurance for health services.

Comparing health insurance quotes can help you optimize how much you pay each month versus the policy’s yearly deductible amount, cost-sharing benefits and out-of-pocket maximum.

Deductible vs. out-of-pocket max vs. coinsurance

Low amount High amount DeductibleLow deductibles usually mean higher monthly bills, but you’ll get the cost-sharing benefits sooner.High deductibles can be a good choice for healthy people who don’t expect significant medical bills.Out-of-pocket maxA low out-of-pocket maximum gives you the most protection from major medical expenses.Having a high out-of-pocket max gives you the biggest risk that you’ll face very high medical costs if you need significant health care.Coinsurance and copayLower coinsurance and copayments can help you reduce your spending if you need moderate amounts of medical services, and you don’t expect to reach the out-of-pocket max.Affordable plans with higher coinsurance and copayments can help you save money if you don’t expect to need significant medical care.

What Kinds of Auto Insurance Coverage Require a Deductible?

Deductibles are most common with collision and comprehensive coverage. In some states, however, you may also have a deductible for personal injury protection or uninsured/underinsured motorist property damage coverage.

  • Collision coverage: If you strike another vehicle or an object, collision coverage will help pay for repairs. Deductibles are standard for this type of coverage and can vary by insurer.
  • Comprehensive coverage: If your vehicle is damaged by hail, fire, falling objects, collision with an animal or something similar, you’ll file a comprehensive coverage claim. Deductibles are standard for this type of coverage and also vary by insurer.
  • Personal injury protection: Also known as PIP, this coverage pays medical bills, funeral expenses, child care expenses, lost wages and other similar expenses, regardless of who caused the accident. PIP is not available in all states and where it is available, it may be required or optional. Also, not all states that mandate PIP also require a deductible.
  • Uninsured/underinsured motorist property damage coverage: If you’re involved in an accident and the other driver is at fault, but they either don’t have enough coverage to pay your property damage expenses or they’re not insured at all, this coverage will kick in. Depending on where you live, you may or may not be required to get this coverage. Deductible requirements can also vary by state.

If you’re not sure what’s required where you live and what to expect, contact your state insurance department to get the correct details.

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