Insurance Deductible

An insurance deductible is the amount an insured person pays for covered losses or covered services before the insurer's obligation to pay begins. HealthCare.gov states the health-plan version plainly, as "the amount you pay for covered health care services before your insurance plan starts to pay." The same idea runs through auto, homeowners, renters and flood policies, where the insurer subtracts the deductible from what it would otherwise owe on each covered claim.

The qualifier in the name here is ours rather than the industry's. HealthCare.gov titles its own glossary entry simply "Deductible", and so do the deductible provisions in a property policy. This page says "insurance deductible" because in a personal finance setting the bare word far more often means the tax adjective, as in a deductible business expense or a tax-deductible contribution. Those are an unrelated concept: one describes what an insurer will not pay, the other describes what reduces taxable income. Nothing about the insurance sense depends on the longer name.

One word, four regimes. A deductible behaves differently enough across lines of insurance that carrying an instinct from one to another is a common and expensive mistake.

On a health plan the deductible is annual, measured against the plan year, and it sits underneath two further layers: copays and coinsurance above it, and an out-of-pocket maximum capping the total of all three. Family coverage often carries two figures at once, an individual deductible that applies to each person and a family deductible that applies to everyone together, and some plans run a separate deductible for a category such as prescription drugs. So "the deductible" on a health plan is frequently several numbers.

On a property or casualty policy the deductible is charged per occurrence rather than per year. Two claims in one year mean two deductibles, and unlike a health plan there is no annual ceiling above them. That single structural difference is the one readers most often carry across by mistake.

On catastrophe coverages the deductible is often expressed as a percentage rather than a flat sum, and the base is the coverage limit, not the home's market value. The National Association of Insurance Commissioners describes earthquake deductibles as commonly running from 10 to 25 percent of the dwelling policy limit, and notes that depending on the policy there may be separate deductibles for the dwelling, for outside structures such as a detached garage or fence, and for contents. Windstorm and named-storm deductibles in coastal states work on the same percentage principle. The practical consequence is that a percentage deductible is usually far larger than the flat deductible on the same policy's other perils, and a household can meet it once for the house and again for the belongings.

On a high-deductible health plan the deductible stops being purely a cost and becomes an eligibility test. Internal Revenue Code section 223(c)(2)(A) sets a statutory floor, currently $1,700 for self-only coverage and $3,400 for family coverage, and a plan below that floor does not qualify its holder to contribute to a health savings account. That reverses the ordinary reasoning: here a higher deductible is what buys access to the account.

Two carve-outs sit above the deductible, and most consumer explanations skip both. The first is statutory. Under 42 U.S.C. 300gg-13 a group health plan or health insurance issuer "shall, at a minimum provide coverage for and shall not impose any cost sharing requirements for" preventive items and services carrying an A or B rating from the United States Preventive Services Task Force, along with recommended immunizations and several other categories. HealthCare.gov puts the consumer version as "All Marketplace health plans pay the full cost of certain preventive benefits even before you meet your deductible." The second is contractual and more variable: HealthCare.gov also notes that "Many plans pay for certain services, like a checkup or disease management programs, before you've met your deductible." So the familiar shorthand that your share begins only once the deductible is met is reliable for coinsurance and only sometimes true for copays. Reading the plan's own summary is the only way to know which services your plan puts ahead of the line.

The deductible is a lever, and the lever has a cash requirement. Raising it reduces what the insurer expects to pay and therefore reduces the premium. The saving is certain and the exposure is contingent, which makes a high deductible attractive right up to the moment a claim arrives. What decides whether the trade was sound is not the policy but your balance sheet: a deductible you cannot produce within a few days converts an insured loss into a borrowing decision. In that sense every deductible you choose is a claim on your emergency fund.

1. A covered loss or covered service occurs, and the insurer prices it. On a health plan that is the plan's negotiated amount, not the provider's list price.

2. The deductible is subtracted first, and that portion is the insured person's to pay.

3. The insurer pays above it, in full on a property claim up to the policy limit, or in the agreed share on a health plan through coinsurance or a copay.

4. The clock resets at the start of the next plan year on a health plan, or at the next separate occurrence on most property policies.

A hypothetical, to show why a percentage deductible surprises people. A homeowners policy carries a $400,000 dwelling limit, a flat $1,000 deductible for ordinary perils, and a 2% named-storm deductible. A kitchen fire causes $30,000 of damage, so the insured pays $1,000 and the insurer pays $29,000. A hurricane later causes $30,000 of damage to the same house, and the deductible is now 2% of the dwelling limit, or $8,000, so the insured pays $8,000 and the insurer pays $22,000. The same loss, on the same policy, costs eight times as much out of pocket, and the reason is the base the percentage is applied to rather than the size of the claim. Note also what the arithmetic does not do: because the base is the coverage limit and not the loss, a $12,000 hurricane claim against the same policy would leave the insurer paying only $4,000, and a claim under $8,000 would produce no payment at all. Figures are illustrative.

Now change one thing about a health plan instead. Suppose a plan has a $4,000 individual deductible and 20% coinsurance, and a covered procedure is priced at $4,000 in January. The insured pays the whole $4,000, because the deductible has not been met at all. An identical procedure in October, after the deductible has already been satisfied, costs $800, or 20% of the same $4,000. Nothing about the care changed; the only variable was where in the plan year it fell.

Pros

• It lowers the premium, and materially so. The insurer avoids both the first slice of every claim and the administrative cost of handling the small claims a deductible removes entirely.
• It keeps insurance aimed at losses you could not absorb, which is what insurance is economically good at, rather than at the ones you could.
• It is one of the few terms in a policy you can adjust at renewal without changing insurers or being underwritten again.
• On a health plan it is bounded from above. Once the deductible, copays and coinsurance together reach the out-of-pocket maximum, the plan pays the rest of the covered in-network year.

Cons

• It is due at the worst possible moment, which is the same moment the loss itself has to be dealt with.
• On a property policy it is charged per occurrence and has no annual ceiling, so an unlucky year can produce it more than once.
• A percentage deductible on wind, hurricane or earthquake coverage is set against the coverage limit rather than the loss, so it can be many times the flat deductible on the same policy and can apply separately to more than one coverage.
• A deductible high enough to make a claim not worth filing means paying a premium for coverage you will rarely use, which is a defensible choice only if the real risk being insured is the large loss.
• Choosing a plan on premium alone hides it. Two plans with the same premium can differ by thousands of dollars in what a bad year costs.