What Is the Importance of a Deductible?

by Steve Brachmann

Choosing the correct level of deductible is a fundamental part of selecting the insurance policy that best fits your financial needs. An insurance policy will many times pay most of a bill that is covered by a policy, but the deductible is one part of the cost that the policy owner is responsible for paying. The amount of deductible chosen also affects the monthly costs of owning an insurance policy.

Deductibles

A deductible is the amount of money that an insurance policy owner must pay out-of-pocket before the insurance policy will offer any coverage. Deductibles are included in many different types of insurance plans, including car insurance, health insurance and renter's insurance. For most types of insurance, deductible amounts typically range from a few hundred dollars to $2,000 or more, depending on the amount of coverage.

Cost of Premium

The cost of a monthly insurance premium is largely dependent upon the amount of the deductible selected on the insurance policy. The lower the cost of the deductible, which will require more coverage on behalf of the insurance provider, the higher the cost of the monthly premium. Choosing a high deductible for an insurance plan can save a policy owner up to $100 per month on their premium costs.

Co-Insurance After Deductible

Some insurance policies, especially health-care plans, charge policy owners for co-insurance after the deductible. This co-insurance charge is typically a percentage of the remaining costs after the deductible has been paid by the policy owner. A health insurance policy with an 80/20 co-insurance after deductible indicates that the insurance provider pays 80 percent of the remaining costs while the policy holder pays 20 percent after the deductible. For example, a policy with a $1,000 deductible and 80/20 co-insurance will cover $14,400 on a $19,000 bill. The policy holder is responsible for paying the first $1,000, as well as 20 percent of the remaining $18,000 bill, or $3,600.

Considerations

An insurance policy owner will have to consider whether or not they can reliably cover the policy's deductible in case of an accident or injury. A higher deductible will lower monthly costs, but it will cost more when the policy owner actually requires coverage. According to a 2010 study released by Harvard Medical School, higher deductible plans for health insurance policies can reduce health care costs across the system by cutting down on requests for preventative health care procedures.

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