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Choosing the Right Deductible for Your Insurance

Although choosing a health insurance plan requires carefully balancing co-pays and coinsurance amounts, it is the monthly premiums and deductibles that represent the greatest out-of-pocket costs for policy-holders. When shopping for new health insurance, many money-conscious consumers are torn between purchasing an affordable policy with high deductibles or a more expensive plan with lower deductibles.

What is a Deductible?

In order to make an informed decision about what type of health insurance plan to purchase, one must first understand what a deductible is. In short, the deductible is the amount of money you must pay out of pocket for covered treatments and medical services before your insurer will begin paying benefits. In other words, if you have a $1,000 deductible and need a $10,000 operation, you will pay $1,000 toward the cost of the surgery, and your medical provider will bill the remaining $9,000 to your insurer, who will then pay the covered amount toward the balance.

How Does a Deductible Affect Your Insurance Premiums?

Deductibles can be as low or as high as you choose. Naturally, the less you want to pay out of your own pocket toward a covered service, the more your insurer will charge you in monthly premiums. On the other hand, choosing a high deductible can reduce your monthly premiums significantly.

Traditional health insurance plans implement both an individual deductible and a family deductible. However, certain high-deductible health plans may forgo the individual deductible in favor of a high family deductible that is usually several thousand dollars. High deductible plans have lower monthly premiums, and insurers encourage policy-holders to take advantage of tax-free health savings accounts which allow individuals and families insured by high deductible health plans to pay for out-of-pocket medical expenses with untaxed income.

How to Know Which Deductible is Right for You

  • Affordability – How much can you afford to spend on monthly premiums each month? If you are in the market for private health insurance, you'll spend more than you will with an employer's health plan. According to the Milliman Medical Index, the average total annual health care expenses for a family under a preferred provider health plan, or PPO, was almost $20,000. That is because a typical monthly premium for a private health plan with a $250 deductible is more than $1,500 per month.

  • If you cannot reasonably afford more than $1,000 in monthly premiums, you may want to switch to a higher deductible health plan. On the other hand, do not choose a $10,000 deductible if you cannot come up with the money to pay the deductible when the time comes to make a claim.

  • Health – Before choosing a deductible, take your and your family's health into account. Does anyone in your family have a health condition that requires medication or ongoing treatments? On the other hand, perhaps you are young, single and in perfect health. By anticipating how much money you expect to spend on health care each year, you can determine which deductible is reasonable for you. For example, it would make little sense to choose a $5,000 deductible if you expect to have a couple of operations in the next few months.

  • Savings – If you have access to a lot of money in a "rainy day" savings account and consider yourself and your family relatively healthy, you may benefit from selecting a high deductible health plan – even if you can afford a lower deductible option. The reason for this is the amount of money you save on health insurance premiums could be used to increase your savings, allowing you to build interest over time.

Furthermore, with the passage of The Affordable Care Act, all health insurance plans – including those that subject all covered services to the deductible – must provide 100 percent benefit coverage for preventive care and wellness visits with no out-of-pocket cost to the policy-holder. That means you can take your healthy family to the doctor for check-ups free of charge, pay approximately $150 or less for sick visits, and stash the rest of the savings away to help pay for deductible costs should they arise.

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