What Is a Deductible for Insurance?

Your deductible is how much you’ll pay out of pocket before your insurance kicks in, but it works differently depending on the type of insurance.

Written by Erin Gobler / June 6, 2022

Quick Bites

  • An insurance deductible is what you’ll have to pay for before your insurance covers the remainder of your claim.
  • Insurance deductibles work differently depending on the type of insurance; some have annual deductibles, while others have per-claim deductibles.
  • There’s an inverse relationship between your insurance deductible and premium — the higher your deductible, the lower your premium, and vice versa.

If you are new to insurance, you definitely want to understand the deductible. It will dictate the price of your premium and it varies depending on the type of insurance.

A deductible refers to the amount of money you’ll have to pay when you file an insurance claim before your insurance company picks up the rest of the tab.

“A deductible is a form of cost-sharing under your insurance plan,” says Natasha Cantrell, the director of individual and family sales for eHealth, which connects people with insurance plans and Medicare.

Understanding and figuring out the best deductible level for you is an important part of financial planning. Let’s take a spin through deductibles.

What is an insurance deductible?

An insurance deductible is the amount you fork over before your insurance covers the rest of a claim.

In other words, it’s the amount that’s “deducted” from your insurance claim. Deductibles exist in nearly every area of insurance planning, from health insurance to auto insurance to pet insurance.

The purpose of a deductible is to share the risk between you and the insurance company. If you’re on the hook for some of the cost, you may be less likely to file a claim or might be more careful about running into a situation where a claim might be necessary.

For some kinds of insurance, you’ll only pay your deductible once a year. For others, you’ll have to pay your deductible each time you file a claim.

How deductibles work

Here is how deductibles work for some of the most common types of insurance.

Health insurance

In the case of health insurance, your deductible is the amount you’ll pay out of pocket each year before your insurance covers the rest. Health insurance deductibles mean you only have to reach your deductible once per year. Each year your deductible amount will reset and you'll have to start over. For example, if you have a $1,000 deductible and pay $1,000 toward your first medical bill of the year, then your insurance will start paying for the rest of the year, though generally not in full.

Tip: A typical deductible can range from $1,000 to upwards of $10,000 per year, with the average falling somewhere in between.

You’ll usually be subject to coinsurance, which is a percentage of each medical bill you’ll have to pay alongside your insurer. A common coinsurance arrangement is 80/20, meaning your insurance company pays 80% of the bill, while you’re on the hook for the remaining 20%.[1]

There are, however, some expenses that insurance will cover before you’ve met your deductible.

“It’s worth noting that most preventive medical care–including annual checkups, immunizations, and well-woman services–are covered before your deductible,” Cantrell says. “That is, you don’t have to pay out of pocket toward your deductible when you get them.”

Auto insurance

The key difference with auto insurance is that rather than having one deductible that you must meet each year, you’ll have to pay your deductible each time you file a claim.

Auto insurance deductibles can range from as little as $250 to upwards of $1,000. In fact, you can even get auto insurance policies with $0 deductibles (though, as you’ll learn later, that could drastically increase your premium). According to American Family Insurance, the average car insurance deductible is $500.[2]

Auto insurance deductibles generally don’t apply to auto liability insurance. Instead, they only apply for coverages like collision and comprehensive auto insurance.

Homeowners insurance

Homeowners insurance works similarly to auto insurance, where you have a deductible for each separate claim. You’ll pay your deductible, and your insurance company will cover the rest, up to your coverage limits.

Homeowners insurance claims are often considerably larger than those for auto insurance, which isn’t surprising considering you’re insuring a much more expensive asset. As a result, the deductibles on these policies are also often higher.

Deductibles often start around $500, and can easily exceed $2,000. The deductible is often set as a percentage of the value of the home unless you pay extra to have it reduced.[3]

Pet insurance

Pet insurance is unique because there are both annual deductibles and per-claim deductibles. Don’t worry—you won’t be subject to both. It simply depends on the insurance company and policy you choose.

Learn More: How Does Pet Insurance Work?

In the case of an annual deductible, you’ll pay it once each year, and once you’ve paid it, your pet insurance company will pay for all or most of your claims. In the case of a per-claim deductible, you’ll pay it each time you submit a bill to your insurer.

The Best Pet Insurance of 2022

The Best Pet Insurance of 2022

Pet insurance can save you money if your dog, cat or exotic animal has an emergency, and it can help you plan for routine care costs, too.

Find out more

If you choose an annual deductible, your pet insurance policy may require a coinsurance amount on the rest of your claims.

It’s important to pay attention to what your pet insurance policy covers and pays for. Some only pay for emergency expenses, and won’t pay for preventative care or annual visits. Others provide more comprehensive coverage.

Additional Reading: Does Pet Insurance Cover Pre-existing Conditions?

Just like other types of insurance, pet insurance deductibles can fall within a wide range from $50 to upwards of $1,000. The most popular deductible is $250 per year.[4]

How insurance deductibles affect premiums

As we alluded to previously, one of the reasons your insurance deductible is so important is because of the impact it has on your insurance premium.

“Premiums and deductibles often have an inverse relationship with one another,” Cantrell says.

In other words, as your deductible goes up, your premium goes down. On the other hand, if you decrease your deductible, you can expect your insurance premium to go down. This is good news because it means you can directly affect your premiums by adjusting your deductible.

“You can often save money on your premiums by switching to a plan with a higher deductible, but there are trade-offs,” Cantrell says.

The biggest thing to consider when setting your insurance deductible and premium is your budget. Obviously, you have to consider your monthly budget when determining what premium you can afford. However, it’s also important to consider what you can afford to pay out of pocket if you have to file a claim. It may sound attractive to save money on your health insurance premiums, but if you can’t afford the higher annual deductible, then it’s probably not worth the small monthly savings.

Unfortunately, you can never know in advance what health, auto, home or pet insurance claims you’ll have to file throughout the year. The best you can do is rely on the data you have—including claims from past years—and make the decision that best fits your financial situation.

Article Sources
  1. “Coinsurance.” Healthcare.gov. https://www.healthcare.gov/glossary/co-insurance/
  2. “How Do Auto Insurance Deductibles Work?” American Family Insurance. https://www.amfam.com/resources/articles/understanding-insurance/how-do-deductibles-work
  3. “Homeowners Insurance Deductibles Explained.” American Family Insurance. https://www.amfam.com/resources/articles/at-home/homeowners-insurance-deductibles
  4. “What is a Good Deductible for Pet Insurance?” 365 Pet Insurance. https://365petinsurance.com/faq/what-is-a-good-deductible-for-pet-insurance/

About the Author

Erin Gobler

Erin Gobler

Erin is a personal finance expert and journalist who has been writing online for nearly a decade. Erin’s work has appeared in major financial publications, including Fox Business, Time, Credit Karma, and more.

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