Knowing the ins and outs of your health insurance plan is important. Misunderstanding it could lead to spending more money than you need to. Among all the terms you'll come across, there’s one concept that’s particularly crucial to grasp: how your deductible works. Why? It’s something that directly impacts your out-of-pocket health care costs. Here’s a definition of what insurance deductibles are and a breakdown of how they function.
What is a deductible in health insurance?
A deductible is the amount you must pay for covered health care services before your insurance kicks in their share. Yes, even though you’re paying premiums, your insurer isn’t necessarily covering your medical costs right away. So if your deductible is $7,000, your insurance won’t defray costs for any services until you’ve spent $7,000. Most types of insurance—including health, auto, and home policies—use a deductible to keep the insurer’s payments lower. Health insurance deductibles vary by insurer, plan, and coverage, but most reset at the beginning of each plan year or if you switch plans.
Terms that are often confused with deductible
The following is a handy list of other common health insurance terms, and how they’re different from the deductible.
- Premium: Your premium is the amount you pay for your health insurance plan every year. A lower premium usually results in a higher deductible, and vice versa.
- Copayment: Also known as copay, a copayment is a fixed amount you pay for a covered health care service or prescription after you’ve met your deductible. The exact cost to you can vary depending on what you’re paying for. Let’s pretend there’s a $50 copay to see an in-network specialist. Until you meet your deductible, you’ll have to pay for the full cost of the covered service, though the insurance company may have negotiated a lesser amount that you’ll have to pay. After that, the visit itself will only cost you $50 (not counting any additional services you receive while there).
- Coinsurance: This is the percentage of a covered service’s cost you’ll be on the hook for after you’ve reached your deductible. If you have 30% coinsurance, your insurance company will pay 70% of covered health care costs after you meet your deductible. Like copays, your coinsurance might change based on the category of service or whether the provider is in- or out-of-network.
- Out-of-pocket maximum: This is the most you could pay for covered health care services in a given plan year. That includes what you spend toward your deductible, copays, and coinsurance, but typically not your premiums. After that, your health plan should pay for 100% of covered benefits. In 2024, individual plans purchased through Healthcare.gov can’t have an annual out-of-pocket max that exceeds $9,450; family plans’ out-of-pocket max can’t exceed $18,900 a year.1
How do deductibles work?
You can see how health insurance deductibles work in this example. Let’s say your health insurance plan has an annual deductible of $1,000, 20% coinsurance, and an out-of-pocket maximum of $6,000.
- You’ll need to pay $1,000 per year toward covered health care services before your insurance covers any costs. Premium payments typically don’t count toward the deductible.
- Once you’ve reached your deductible, you’ll pay 20% of covered, in-network health care services.
- If your total out-of-pocket costs for covered services exceed $6,000, your insurer will pay 100% for covered costs going forward. (You’ll still have to pay your premium.)
Your deductible can majorly affect your out-of-pocket costs, especially if you run into hefty medical bills. The good news is that your out-of-pocket max can put a cap on your expenses.
Are there different types of deductibles?
Deductibles come in several shapes and sizes. Here are the ones you’re most likely to encounter.
- Family vs. individual deductibles: Family health insurance plans often have individual deductibles for each covered person and a family deductible. Coinsurance will kick in for everyone on the plan once the family deductible is met—even if individual deductibles aren’t met yet.
- In-network vs. out-of-network deductibles: Some health plans have one deductible for care you receive from in-network providers and another higher deductible for care that comes from providers out of your plan network.
- Separate deductibles for different services: For example, a plan may have one deductible for physician visits and another for prescription drugs. Knowing this can help guide your care choices and keep you on budget.
- Standard deductibles vs. percentage deductibles: A standard deductible is a specific dollar amount you must pay before your insurance kicks in. This is the kind of deductible health insurers tend to use. Percentage deductibles apply to homeowner’s insurance rather than health insurance. They’re usually between 1% and 10% of your home’s insured value.
How do deductibles impact your insurance premiums?
In most cases, the higher your deductible, the lower your monthly premiums. This is something to keep in mind when choosing a health insurance plan. If you end up not needing substantial medical care, a high-deductible health plan could make financial sense because you’ll likely pay less for your premiums. The opposite is also true. People who have chronic conditions or ongoing medical needs might save money by paying a higher premium, getting a lower deductible, and having insurance chip in on costs faster.
Why have a deductible?
Some health plans have no deductible, which could be appealing in certain circumstances. But opting for a plan with a deductible has advantages.
- Lower premiums: These reduced monthly costs can add up to big savings over time, especially if you have minimal medical needs.
- Potential tax advantages: Enrolling in a high-deductible health plan typically allows you to contribute to a health savings account (HSA). This is a tax-advantaged account that lets you save for qualified medical expenses. Your contributions reduce your taxable income, and the money isn't taxed while it’s in the account—even if it earns interest or investment returns. You can even open an HSA outside of what’s offered by your employer’s plan. Bonus: As long as you use your HSA funds for qualified medical expenses, you won't owe taxes when you take money out of the account. (Psst … Fidelity offers an HSA.)
What to consider when it comes to deductibles?
When selecting a deductible, here are some other important things to consider.
- Personal health: If you have chronic conditions or might need frequent medical care, a lower deductible might be cost-effective.
- Average health care spending: Review your total health care costs from the previous year and consider if you would’ve been better off with a different deductible.
- Financial stability: A plan with a higher deductible can be a gamble if unexpected medical costs arise and you’re not prepared to pay the upfront expenses.
- Family considerations: If you’re choosing a plan that covers family members, it’s important to understand the impact of family and individual deductibles.