Deductible

What is a deductible?

A deductible is the amount a person with insurance pays toward her claim before the insurance company pays the remainder. A low deductible equates to lower out-of-pocket expenses while a high deductible means paying higher out-of-pocket expenses.

Deeper definition

Deductibles are a part of any kind of insurance plan, including auto insurance and homeowners’ and renters’ insurance. When filing a large claim, the insurance company doesn’t pay anything until the insured has paid her deductible. Policyholders agree to the terms of the deductible when taking out the plan, and plans with higher premiums tend to have lower deductibles and vice versa.

Deductibles reset yearly, meaning that every year the insured files an insurance claim she’ll need to meet the deductible again even if she met it the previous year. But they are not tied to individual claims: the policyholder’s payments toward her deductible accumulate with each claim, so if she met a deductible in a previous claim, she won’t have to pay one again.

Most people encounter deductibles as a part of health insurance. When an insured person needs to see a doctor, she’ll find that routine procedures, like office visits or prescription drugs, are covered by the insurance company except for a low, predetermined flat fee the patient pays, which is called a copay. Deductibles come into play for more extensive and expensive medical procedures, such as an emergency surgery or injuries sustained in an accident, and often run into the thousands of dollars.

Some insurance plans require policyholders to pay coinsurance after the deductible is met. That’s a predetermined percentage of the remaining costs the insured has to pay while the insurance covers the rest, up to a limit called the out-of-pocket maximum after which the insurance company pays 100 percent.

Worried about a high deductible? You might want to consider refinancing your mortgage.

Deductible example

Jaime is a knight in the service of a great king. He takes out an insurance policy with a 3,000 gold ingot deducible on his prized warhorse, Honor. The next time he goes to war, the horse is wounded, and Jaime makes a claim to his insurance company. The royal veterinary guild assesses that it’ll cost 50,000 gold ingots to perform surgery on Jaime’s warhorse, so he has to pay the first 3,000 ingots before the insurance company will pay the remaining 47,000 gold ingots.

He’s also required to make a 10% coinsurance payment each month, up to another 3,000 gold ingots, his out-of-pocket maximum.

In the next battle, Jaime’s warhorse is wounded again. The veterinary guild tells him it’ll cost 20,000 gold ingots to fix Honor this time. But because he’s already reached his deductible and out-of-pocket maximum for that year, the insurance company pays the full amount.

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