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How do Deductibles Work?

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

When purchasing different types of insurances, you will keep hearing the word deductible. This lesson will tell you what deductibles are, how they work and when you have to pay them.

What Is a Deductible?

Imagine that a whole bunch of freak accidents just happened to you. First, a neighbor kid accidentally shattered your living room window with his baseball. But, you are not worried because you have homeowner's insurance. Then, you rear-end somebody in a car accident. Your car is damaged and you end up in the hospital with a hurt arm. But thankfully, you also have car and health insurance. You know your insurance will cover some of your total costs from these freak accidents, but just how much will they cover?

Well, that depends on both the type of insurance and the deductibles that you have. The word deductible is associated with insurance plans and it is the amount you have to pay before your insurance begins paying for services. This is true for auto insurance, homeowner's insurance, and health insurance.

While you may not think it's all that important to know about deductibles, in reality, deductibles tell you just how much you should expect to pay for certain services or repairs and they affect how much you actually pay for your insurance coverage. Let's take a look!

Health insurances have deductibles that must be met before they begin helping you pay
deductible

How Do Deductibles Work?

The way insurance works is that you pay a certain monthly premium to have the privilege of being covered by the insurance company. However, when you purchase your policies, there are different plans offered - some with lower deductibles and some with higher deductibles.

If you choose a policy with a higher deductible, that means you are going to be responsible for a greater amount when you make a claim. Conversely, this means the insurance company will have to pay less of the total amount. Therefore, the higher the deductible, the lower your monthly premiums will be.

Nowadays, it's very rare for someone to even offer a $0 deductible. Car and homeowner's insurances typically offer a $250, $500 or even a $1000 deductible. These deductibles apply per occurrence/incident.

Health insurance, on the other hand, has deductibles that go up into the thousands. Your deductible can be $2000, $5000 or even more. These deductible amounts are always for a whole calendar year. So, once your deductible has been met for the year, your insurance will cover the rest of the costs.

So, the deductible amount is the amount you have to personally pay for services and repairs before your insurance will begin helping to pay for things. Let's see how deductibles work with your freak accidents.

Example

You get an estimate for your car and find out that it will cost $1,500. It is going to be $500 to replace the living room window, and your hospital stay cost you $16,000! You're looking at all this money and you know you can't afford to pay for it all. So you call your insurance company to see how they can help. This is when they tell you that they will help pay only after your deductible has been met.

Car Repairs

Your car insurance deductible is $500, after which your car insurance covers all the costs (but only for this one accident). So, you will be responsible for paying $500 to the auto repair shop and the insurance company will cover the remaining $1000.

Window Replacement

Your homeowner's insurance has a deductible of $500 per incident. Well, since the window costs that much to replace, this $500 is the amount you have to pay. Insurance won't cover that since that is your deductible.

Hospital Bills

Your health insurance has a yearly deductible of $5,000, and after you've reached your deductible, then they will help pay 80% of your covered costs. This means that for your hospital stay, you end up paying the first $5,000 and then 20% percent of the remaining balance ($11,000 * 0.20 = $2,200) for a total of $7,200.

What Does Insurance Cover Then?

You may be wondering what your insurance actually covers if you first have to pay a certain amount before they begin paying. For auto and homeowner's policies, they usually pay 100% of your bill after you've paid your deductible (again, this is per incident).

Health insurance is very different from and more complicated than auto and homeowner's insurances. Health insurance companies usually pay a stated percentage after you've paid your deductible - it all depends upon your plan.

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