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Deductible

Updated on January 5, 2024
Article byRutan Bhattacharyya
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Deductible Meaning

A deductible is an amount an insured individual must pay toward a claim before their insurance coverage kicks in and the insurer pays the remaining amount. This concept aims to prevent insured individuals from making claims for which they can bear the expenses without any hassle.

Deductible

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Depending on the type of insurance policy, for example, health and auto, insurers might require policyholders to pay more than one deductible. Typically, policyholders can choose the amount when purchasing the insurance policy. By selecting a higher amount, they can pay a lower insurance premium. However, they must pay a higher premium if they select a lower amount.

Key Takeaways

  • The deductible definition refers to a policyholder’s payment toward a covered claim before the insurer starts paying. It prevents insured individuals from not acting in good faith, thus reducing the insurer’s risk.
  • The out-of-pocket maximum includes multiple payments, such as coinsurance, copayment, etc.
  • Deductible and premium have an inverse relationship. When individuals pay a higher amount on a claim, they have to pay a lower premium. In contrast, individuals must pay a higher premium if they choose a lower amount.
  • Individuals buying an insurance policy can decide the amount they’ll pay on a claim.

Deductible Explained

The deductible definition refers to the amount a policyholder must pay on an insurance claim before the insurance company pays the remaining claim value. Depending on the insurance policy, this amount can be high or low, influencing the premium one needs to pay toward an insurance policy. In other words, an inverse relationship exists between the deductible and premium. This is because a higher amount paid by the insured on a claim means a lower financial risk for the insurance provider. Thus, typically, the higher this amount, the lower the premium.

One must remember that policyholders can decide the amount of deductible in health insurance or any other type of coverage they must pay in the case of a claim. When an individual agrees to pay a specific portion of the claim value, the insurer provides the minimum deductible. If the former wishes to save on insurance costs, they can opt for a high deductible. Nevertheless, one cannot choose an amount lower than the minimum amount set by the insurance provider.

Individuals buying insurance can find the amount in the policy’s terms and conditions section. A policyholder must ensure that they completely understand the policy wording. If there is any confusion, one must not hesitate to ask the policyholder about the amount they must pay on a claim before the coverage kicks in. Also, individuals must remember that this amount is not available on every insurance policy. If it is unavailable, an individual purchasing the policy may have to pay a fee. That said, they can ask the insurance provider to waive the fee. Ideally, one should ask about the cost of a policy with and without the waiver.

Since this clause in an insurance policy distributes the risk between the insurance provider and the policyholder, it safeguards the former from paying out every policy.

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Examples

Let us look at some deductible examples to understand the concept better.

Example #1

Suppose a homeowner named Michael purchased an insurance policy from ABC Company to get the monetary compensation in case of damage to the property. The policy comes with a deductible of $5,000. In the case of a claim for damage worth $12,000 to the home, Michael must pay an out-of-pocket amount of $5,000, and the insurer (ABC Company) will pay the difference, i.e., $7,000.

Example #2

U.S. President, Joe Biden, signed the Inflation Reduction Act in August 2022. Through this Act, he is delivering on the promise to decrease the cost of prescription drugs. From the next year, Medicare enrollees will have to pay a maximum of $35 in cost-sharing for every covered insulin product. The products include insulin covered by a prescription drug plan or the insulin products people take via a conventional pump covered under the Original Medicare Plan. Moreover, medical enrollees will not have to pay a deductible for all covered insulin products.

Deductible vs Out Of Pocket vs. Copay vs Premium vs Coinsurance

Individuals purchasing an insurance policy for the first time can find it difficult to understand terms like premium, coinsurance, copay, out-of-pocket maximum, and deductible. Hence, the table below highlights the distinct characteristics of each of these concepts. One can go through the points below to get a clear idea of these concepts.

DeductibleOut Of PocketCopayPremiumCoinsurance
This is the amount the insured pays on a claim before the insurance company assumes an expense.The out-of-pocket maximum or limit is the maximum amount a policyholder has to pay for healthcare services in a year before the insurer covers the remaining amount.It is a fixed amount that an insured individual must pay after paying the deductible.The premium is the charge for a health insurance policy that the insurer levies on the policyholder.This is a percentage of the deductible amount the policyholder pays for the covered healthcare expenses after paying the deductible.
This amount is a contribution to the out-of-pocket maximum.It includes various payments, like coinsurance, deductible, and copayment.Individuals may have a copay before they finish paying the deductible. Moreover, they may have a copay after they finish paying the amount. However, In most cases, the copay does not go toward the policyholder’s deductible.It does not contribute to the out-of-pocket maximum.Unlike the policy premium, it contributes to the out-of-pocket limit.

Frequently Asked Questions (FAQs)

1. How much is Medicare deductible for 2022?

The amount for Medicare Part A is $1,556 for every benefit period. On the other hand, the amount for Part B is $233. In 2023, the amount for Part A and Part B will be $1,600 (per benefit period) and $226, respectively.

2. Do deductibles reset every year?

Opting for a low deductible in health insurance is suitable for policyholders when any injury or illness requires considerable medical care. On the other hand, selecting a lower amount is ideal when the insured individual does not require extensive medical care. That said, before opting for a plan with a high deductible plan, one must assess their ability to pay the amount if a medical emergency arises.

What deductible is best for health insurance?

Opting for a low deductible in health insurance is suitable for policyholders when any injury or illness requires considerable medical care. On the other hand, selecting a lower amount is ideal when the insured individual does not require extensive medical care. That said, before opting for a plan with a high deductible plan, one must assess their ability to pay the amount if a medical emergency arises.

3. Does Medicare have deductibles?

Yes, Medicare has different amounts for Part A and Part B.

This article has been a guide to Deductible and its meaning. Here, we explain the concept with examples and compare it out of pocket, copay, and coinsurance. You can also go through our recommended articles on corporate finance –

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