The insurance industry, like other industries, uses its own terminology. You hear or read the terms “deductible” and “out-of-pocket expenses” regularly in discussions and documents about insurance policies. Although deductibles and out-of-pocket expenses are common in most types of insurance and can often be used synonymously in homeowners and automobile insurance, in health care coverage it works differently. Regardless, of the type of insurance, deductibles are out-of-pocket expenses.
Understanding Your Deductible
Your health insurance deductible refers to the dollar amount you must pay before the insurer will pay. For example, if you have a $1,000 deductible, you must meet this responsibility before your insurer will pay for any covered services. Keep in mind, too, that not all services are subject to a deductible. This varies by policy and company, but as a standard rule, preventive services require you to pay no out-of-pocket costs and are not included in your deductible requirements.
Your out-of-pocket maximum refers to the total your insurance company can require you to pay during a specified period, often annually, for health care services. If you reach the out-of-pocket limit, as stated in your policy, the insurer will then pay 100 percent of covered charges. The Affordable Care Act limits the maximum an individual must pay to $6,600 in 2015. Family plans are subject to a $13,200 out-of-pocket limit. Insurance premiums are not included in figuring either the deductible or out-of-pocket limits.
Coinsurance and Copay
The health insurance term "coinsurance" refers to a split between you and your insurer based on a 100 percent total. For example, suppose you're hospitalized and your bill is $10,000. If your policy states that the insurer will pay 80 percent and the policyholder will pay coinsurance of 20 percent, you will be responsible for $2,000. In addition, some health insurance plans require copayments, a specific amount you must pay for specific services. If your plan requires you to pay a flat fee of $10 for each visit to your family physician, that is your copayment. Coinsurance costs and copayments do not go toward your deductible. However, under the Affordable Care Act, the expenses do count toward the out-of-pocket limit in your policy.
Automobile insurance policy deductibles and limits are generally set dollar amounts. For example, if the policyholder has a deductible of $1,000 and files an accident claim for $10,000, the insurer will pay no more than $9,000. The first $1,000, the deductible, is an out-of-pocket expense for the policyholder. Coverage limits can also affect out-of-pocket expenses. If the terms of the policy state that the insurer will pay $100,000 maximum per accident claim and the policyholder files a claim for $120,000, then the policyholder will be responsible $20,000 of the cost.
Homeowners insurance policies may have more than one deductible amount depending on the type of loss. For example, the deductible for wind and hail damage may be different from for other types of loss, such as fire or water damage. These deductibles may be percentages based on the home's value. Suppose the home is valued at $200,000 with a 2 percent deductible on fire damage. In this case, the homeowner will be responsible for the first $4,000 of a loss resulting from fire. These deductibles are generally set up on an annual basis, meaning any out-of-pocket expense paid this year will not count toward the deductible the following year.