The 411 on health insurance deductibles — and how they determine what you pay for medical care.
Simply put, your health insurance plan’s deductible is the dollar amount you pay for medical costs before your insurer starts picking up the tab.
Here are a few examples to better explain:
Say you go all Clark Griswold and chop down a twelve-foot Christmas tree for the house. When you unwrap this gargantuan tree in your living room, the branches explode out and one particularly nasty branch stabs you in the arm. It looks like you’re going to need a couple of stitches, so you head on over to the emergency room. The bill ends up costing you $1,000. Because your deductible is $3,000, you have to pay the $1,000 hospital bill.
But say you have that $3,000 deductible plan and you go all Clark Griswold again, putting an insane amount of Christmas lights on your house. This time you fall off a ladder and end up breaking your arm and your leg. You go to the emergency room, receive treatment from a doctor, get some crutches and end up with a $7,000 bill. Because your deductible is $3,000, you pay the first $3,000 of the bill and then insurance pays the remaining $4,000 (if you don’t have a co-insurance amount).
What in Sam Hill is a co-insurance amount? It’s the amount you pay after you’ve reached your deductible and your insurer doesn’t cover the full cost of medical service. Co-insurance is typically 80/20 or 70/30 (you pay 20% or 30% of your medical bills; insurance covers the rest).
But wait! There’s some good news, Clark! Say you end up having a REALLY big hospital bill, like Cousin Eddie accidently ran you over with his RV. You have to stay in the hospital for a week to recover. This bill is going to be high, but fear not. Most insurance plans have an out-of-pocket max, which means at a certain point your insurance will pay for everything. This, of course, is after you’ve reached your deductible and any amount that is subject to co-insurance. Your out-of-pocket max is the absolute most you’ll pay for your medical bills.
Getting back to deductibles though, we’re often asked if a lower or higher deductible is better. For people with tight monthly budgets — like Cousin Eddie, for instance — a high deductible plan might be the only way to go. The difference between a high deductible plan versus a low deductible plan can be hundreds of dollars in your monthly payment. But unless you need expensive medications for pre-existing conditions, choosing a low deductible plan is actually a bad bet for most people.
That’s because a high deductible plan can work in your favor financially if you’re not someone who typically visits a doctor on a regular basis. Your all-in yearly cost for a higher deductible/lower monthly payment plan can often be cheaper than a lower deductible/higher monthly payment plan as the latter might have monthly payments that are through the roof!
Another nice feature of a high deductible plan is that you can typically use it in conjunction with Health Savings Account. With an HSA, you can contribute tax-free funds into your account to help pay for medical expenses including your deductible!
In general, for those that can afford the potential risk of a large medical bill, we recommend a high deductible plan. That’s because nine times out of ten, a high-deductible plan will save you money. With a low deductible plan, you’re paying higher monthly premiums and you won’t ever be able to get that money back.
