Insurance Deductibles 101

A deductible is the money you pay, out of your own pocket, before your insurance kicks in to cover the rest of your bill. It’s different than your insurance premium, which is the monthly or annual fee that you pay for your coverage.

To make sure that you’re setting aside enough dollars for car insurance and health insurance deductibles, let’s take a look at how they work:

How Deductibles Work

Car Insurance

Every time you file a claim for car repairs, you pay the deductible stipulated by your car insurance, and your insurance carrier pays the rest. For example, if you have a 500-dollar deductible and need 1,000 dollars to fix your busted head gasket, you’ll pay 500 dollars and your insurance will pay the remaining 500 dollars.

Health Insurance

With health insurance, every time you visit the doctor, undergo surgery or require a medical procedure, you pay towards an annual deductible. For example, if you pay 500 dollars for a medical procedure, and your deductible is 500 dollars, you’ve met your deductible for the year. (In this case, if your procedure only cost 200 dollars, you’d still have to pay another 300 dollars before you meet your deductible.)

If you’ve paid for enough health care to meet your annual deductible (fingers crossed it was all preventative care!), the good news is that you’ll only be responsible for your copay (which is short for “coinsurance payment”) for the rest of the year. That is, of course, unless you reach your out-of-pocket maximum, an amount stated in your policy that means just what it says: you’ve paid the maximum amount out of your own pocket, and your insurance will cover 100 percent of your costs for the rest of the year.

When Should You Pay Your Deductible?

Car Insurance

There are some instances where you might prefer to avoid making a claim and pay for a car repair from your own funds—but be sure to check your policy because some providers require you to report every incident. Some people avoid filing auto claims because multiple claims in a year can cause your insurance premium to increase. So, if you’re permitted and able to pay for repairs out of pocket, consider doing it.

To further minimize repair costs, keep up with regular car maintenance, like oil changes, rock chip repair and recommended services that correspond with your mileage.

Health Insurance

If you have health insurance, you’ll pay your deductible as described above. If you don’t, you can find cash-only clinics, direct primary care and concierge-based medicine (practitioners who don’t accept insurance).

What About High Deductible Health Plans?

Car Insurance

If you choose a high deductible with your car insurance plan, you’ll have a lower monthly premium payment. While the savings is great for your wallet, it can lead to disaster if you’re not prepared when you file a claim.

Kevin Courtright, a licensed insurance expert with The General Auto Insurance, says, “I recommend high deductible and lower monthly payments, if you use the savings to build a vehicle fund. You should build the fund up until it is equal to your deductible. It takes discipline, but it’s always better to have money in your own pocket.”

That’s Rule Two, in action! So, if you go the high deductible route, create a category in your budget and allocate dollars to it each month until you reach your goal.

Health Insurance

While high deductible health insurance plans can be cheaper when it comes to your monthly payments, they may not save you cash if you visit your doctor often. For example, it could cost you an average of $100 to check on your baby’s cough during the flu season—instead of the average $15 copay of standard health plans. But, if you’re relatively healthy and take advantage of covered checkups, this option might be the best for your budget.

Embrace Your True Expenses

When it comes to budgeting for car-related expenses and health care needs, understanding your deductibles is key. So, get your policies out right now, examine the fine print and take note of the costs that will fall on your shoulders—and budget, accordingly. The next time your car breaks down or you need to visit the doctor, you’ll have one less thing to worry about.

Parker O’Very is a freelance writer, marketer, husband and singer. Find more from Parker on Twitter.