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Deductible

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 25th, 2023
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Definition

The term deductible is used to describe a policyholder's annual responsibility for expenses covered by an insurance policy. Deductibles can apply to homeowners, automobile, and healthcare insurance plans.

Explanation

Deductibles allow insurance companies to lower annual premiums through a cost-sharing arrangement with the policyholder. If the insurance is not used in a calendar year, then a deductible would not apply.

Paying a deductible is commonplace with traditional medical plans, and is paid in full by the policyholder. Only after a deductible is satisfied does the insurance company begin sharing the expenses associated with providing medical services.

While deductibles are commonly found in traditional (fee for service, indemnity plans), they are often applied to medical plans such as health maintenance organizations (HMO), preferred provider organizations (PPO), and point of service (POS) plans, when the patient seeks treatment outside the list of network providers.

The typical cost-sharing structure of a healthcare plan can include coinsurance, copayments and deductibles.

Example

Sally's fee for service pays 100% of medical services after a deductible of $1,000 is paid each year. Her doctor's bill for a recent outpatient procedure was $2,500. This was Sally's second visit to the doctor this year. Earlier, she was billed $500 for a medical examination.

Under this plan, Sally is responsible for the first $1,000 of her medical care. Since Sally had already paid $500 out-of-pocket for her medical examination, she needs to pay another $500 for the outpatient procedure to satisfy her annual deductible. Therefore, the insurance company's share is $2,000. Since Sally satisfied her deductible for the calendar year, she will not have any more out-of-pocket costs until next year.

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