What is a Health Insurance Deductible and How does it Work?

Nadya Camerino
Last updated: 18 hours ago

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Young family looking at health insurance deductible

It’s normal to feel a little overwhelmed when purchasing health insurance.

After all, the process is usually jargon-filled and incredibly boring. Plus, there’s an abundance of health insurance options available, making it even more confusing to navigate for the average person.

The truth is, insurance is easier than it might seem from a distance. The trick is familiarizing yourself with three major health insurance terms: deductible, copay, and coinsurance.

Grasping an understanding of these definitions will help demystify any underlying confusion and help you choose the right insurance plan to protect you and your loved ones.

In this WealthRocket article, we’ll provide definitions for and explain the terms deductible, copay, and coinsurance.

What is a Health Insurance Deductible: How it Works

An insurance deductible is a sum of money that a policyholder pays upfront before the insurance provider covers additional costs. This payment usually applies to all types of insurance. However, not all insurance policies require a deductible payment.

Most health insurance policies require a deductible. The amount you pay varies depending on the insurance policy. Generally, deductibles can range from a couple of hundred dollars to a couple thousand.

Health insurance policyholders must also pay a monthly payment known as a premium.

A deductible is not always necessary with certain insurance plans.

If the insurance plan has a lower monthly premium, it will typically have a high deductible and vice versa.

Deciding on the best deductible is no simple feat, since no one can see what the future holds. Still, any insurance policy is better than no insurance.

What is Copay?

When it comes to health insurance, a copay, also commonly referred to as a copayment, is a fixed amount of money you have to pay each time you visit a doctor or pick up medication. Sometimes, a copayment is required when visiting the emergency room.

Typically, the insurance provider sets a fixed amount as the copay figure, which remains the same no matter how often the insurance holder uses the service. The average cost of a copayment is around $25, though this figure varies.

These out-of-pocket payments depend on the facility that you attend and the type of doctor you see.

For instance, a dermatologist may have a different rate than a family doctor. These are fixed rates and remained the same throughout the terms of your plan.

What is Coinsurance?

Coinsurance is the percentage in a health insurance policy that determines the cost-sharing policy between you and a healthcare insurance provider.

This percentage requires the policyholder and insurance provider to split the cost of any health costs, depending on the policy.

With coinsurance, you are still responsible for the deductible and copay, along with the expense ratio.

An Example of How Health Insurance Works

Say your health insurance plan has 20:80 coinsurance; your insurance will pay out 80 percent of covered medical services.

Let’s pretend you have a deductible of $500, with a $25 copay and 80:20 coinsurance.

You twist your ankle while out for a run. There was so much swelling that you thought you broke it. You head to the emergency room, where a doctor orders x-rays to find out how to treat the pain most effectively.

Luckily, you only sprained your ankle, so your doctor prescribes some medication for pain relief.

Here are the costs of the entire ordeal:

The emergency room visit costs $500.
The radiology procedure costs $1,000.
The medication rang up to $30.

Here’s what you owe if you have health insurance:

You will pay the entire $500 emergency room charge, satisfying your deductible.
Now, your coinsurance can be applied, which would cover 80% of the cost of the x-rays, leaving you with a cool $200.
Lastly, the medication at the pharmacy will add up to $25.

In this example, you will owe the hospital $725 instead of the full amount of $1530. Needless to say, health insurance can help you save money and avoid a personal financial crisis.

This example aims to provide a richer understanding of each term defined above.

Fees will vary depending on your plan, but ideally, you now have a better understanding of healthcare insurance complexities.

Frequently Asked Questions

How do I pay the deductible?

How do insurance companies decide what the deductible should be?

What does it mean if I have a $1,000 deductible?

How do I pay the deductible?

Deductibles come out of the policyholder's pocket. These fees go directly to the medical facility providing care. After using the full deductible, the insurance company begins sharing the costs with their coinsurance clause. Each plan provides different terms in regards to the percentage of coinsurance.

How do insurance companies decide what the deductible should be?

Choosing a plan with the right deductible will factor in characteristics such as age and medical history. People who are young and healthy are less of a risk for insurers, meaning plans come with lower monthly premiums and higher deductible rates because there's a higher chance that they won't need medical attention in the upcoming months or year.