Deductible

Definition

A deductible is the amount of money a policyholder must pay out-of-pocket before their insurance coverage kicks in to cover the remaining costs. It acts as a risk-sharing mechanism between the insurer and the insured, encouraging responsible use of insurance and reducing moral hazard by making individuals financially accountable for smaller claims.

5 Must Know Facts For Your Next Test

1. Deductibles can vary widely based on the type of insurance policy and the level of coverage selected by the policyholder.
2. Higher deductibles typically result in lower premium payments because the insured assumes more risk.
3. Some policies may have separate deductibles for different types of coverage, such as health and auto insurance.
4. Certain preventive services may not require a deductible payment, meaning they are fully covered regardless of whether the deductible has been met.
5. Insurance companies often provide detailed information on how deductibles work in their policy documents, helping consumers understand their financial responsibilities.

Review Questions

• How does a deductible function as a risk-sharing mechanism between the insurer and the insured?
  • A deductible functions as a risk-sharing mechanism by requiring the insured to pay a certain amount out-of-pocket before the insurer covers any additional costs. This arrangement helps ensure that policyholders are more judicious in filing claims for minor expenses, reducing unnecessary claims that could lead to higher premiums for everyone. By making individuals accountable for part of their expenses, insurers can keep overall costs down and encourage more responsible use of their services.
• Compare and contrast the role of deductibles in health insurance versus property insurance.
  • In health insurance, deductibles often influence how much policyholders pay for medical services and can vary based on specific plans. Some health plans may waive deductibles for preventive care. In property insurance, deductibles are typically applied when filing claims for damages or losses, where higher deductibles can lower premium costs. While both types serve to share risk between insurers and insureds, they are applied differently based on the nature of the claims.
• Evaluate how choosing a higher deductible could impact an individual's financial strategy and risk management approach.
  • Choosing a higher deductible can significantly impact an individual's financial strategy by lowering monthly premium costs but increasing out-of-pocket expenses during unforeseen events. This decision requires careful consideration of personal financial circumstances and risk tolerance. By opting for a higher deductible, individuals may build a savings buffer to cover potential claims while benefiting from lower overall insurance costs. However, they must also weigh the risk of being unable to afford sudden large expenses against potential savings on premiums.

Related terms

premium: The amount paid periodically to an insurance company to maintain coverage under an insurance policy.

co-pay: A fixed amount that a policyholder pays for a specific service or prescription, with the remainder covered by the insurance.

out-of-pocket maximum: The maximum amount a policyholder will have to pay in deductibles, co-pays, and other expenses before the insurance covers 100% of costs.