Low vs. High Insurance Deductibles

When trying to decide which health and auto insurance plans are best for your current life situation and budget, it can be hard to look past the “sticker price” of the monthly premium. But the premium, the amount you pay every month for insurance coverage (even if you don’t use it), isn’t the whole story of what an insurance policy can cost you and if it’s the best one for you.

Regardless of the type of insurance—life, auto, health, etc.—there is an inverse relationship between the premium and the deductible: a high premium means a low deductible, and a low premium means paying a high deductible. But when you pay that deductible and how it works differs between health and auto insurance.

Here’s what you need to know when choosing between high and low deductible insurance plans for health and auto insurance.

For health insurance

With health insurance, your monthly premium is taken out of your paycheck, and your deductible is the out-of-pocket amount you must pay for certain health services before your insurance company begins paying for all or most of those costs. Health insurance deductibles usually exclude preventative care costs.

It’s also important to understand a plan’s out-of-pocket limit, which is a cap on how much you’ll have to spend for medical care in a year, not including premiums, when you stay within your insurance network. After meeting this limit, your insurance will pay for all in-network services covered by your policy.

Whew, now that we understand all those terms, we can begin to break down the pros and cons of health insurance plans with low or high deductibles and what type of person would benefit from each.

A health insurance plan with a low or no deductible and a high premium can make it easier to predict healthcare costs and often includes more generous coverage. This can save you money in the long run if:

• You’re pregnant, planning to become pregnant, or have small children
• You have a chronic condition or need to see a doctor (especially specialists) frequently
• You’re over 65
• You take several prescription medications, or even one expensive drug
• You or your children play sports, especially those with high risk of injury

This type of plan can save you money if you’re part of this list because the services covered by your high premium is more likely to include the doctors’ visits and prescriptions you’ll regularly need. You’re also more likely to hit your deductible early each year and have more of your health costs covered entirely or mostly by your insurance provider.

Now on to high-deductible plans.

These plans can have a deductible close to their out-of-pocket limits, often $5,000 or more. So while you’re paying much less each month with a low premium, coverage of certain types of doctors and prescriptions will be limited, and if you do have a health emergency, you’ll have to pay for most or all of it yourself.

Despite this, these plans can still save you money if:

• You’re young, healthy, and/or rarely get sick or injured
• You can afford to pay your deductible upfront or within 30 days of receiving a medical bill
• You can make significant contributions to a health savings account (HAS) every month
• You’re healthy and want to use an HSA as a way to save money

For car insurance

A car insurance deductible is the amount you pay out of pocket when you make a claim. For example, replacing a broken windshield might cost $400. If your deductible for this kind of damage is $250, you would pay $250 and your insurance company would pay the other $150. Only comprehensive and collision coverages carry deductibles, as they are insurance on damage to your property. Liability coverage does not carry a deductible because it is insurance on injuries and damages you cause to other people and their property.

According to the Insurance Information Institute, raising your deductible from $200 to $500 can reduce your premiums by 15 to 30 percent. Doubling your deductible to $1,000 could save you up to 40 percent. For example, on average, a $500 deductible costs $125/month, or $1,500/year, in premiums. The average for a $1,000 deductible is about $110/month, or $1,337/year.

Often, a smart move is to set your monthly premium at a rate you can afford and then regularly put money into an interest-earning account at your credit union, with the goal of eventually lowering your premium and being able to pay the out-of-pocket cost of a higher deductible with your savings. This also allows you to use this savings for something else—like buying a newer car when you need it.