What’s a deductible and how does it work?

A deductible is the amount of money you pay out of your own pocket toward a covered claim. It is a key feature of many types of insurance coverage. You'll typically find deductibles for certain coverages in homeowners, renters, and auto insurance policies. You can typically choose your deductible, but note that the lower your deductible, the higher your premium will likely be, and vice versa.

A policy may have multiple deductibles. For example, if your car insurance policy has comprehensive coverage and collision coverage, you likely have a comprehensive deductible and a separate collision deductible.

Deductibles in car insurance

Let’s say the collision coverage on your car insurance policy has a $500 deductible. You damage your car in a covered accident. It costs $3,000 to repair. You’d pay $500 toward repairs, and your insurer would cover the remaining $2,500.

Unlike health insurance, which typically has one deductible to meet each year, the deductible on an auto insurance policy’s coverage will apply each time you file a claim.

Deductibles in home insurance

Deductibles in home insurance works virtually the same as with car insurance. You pay an initial deductible before coverage pays for the rest. Say you have a $1,000 deductible. A hailstorm damages your roof. You’d first pay your $1,000 deductible before homeowners coverage kicks in.

It’s important to note that, as with auto insurance, the higher your deductible is, the lower your insurance premium is likely to be. A lower deductible means you pay less during a claim but more for your premium.

Deductibles in health insurance

Health insurance deductibles work differently than auto and home insurance. Where auto and homeowners deductibles apply to each claim, there is only one health insurance deductible, each year.

For example, let's say your health insurance has a $500 deductible. This means you need to pay the first $500 of your medical bills before your insurance starts pitching in.

Then, once you’ve paid off your deductible, you may have coinsurance and a copay with each claim moving forward, depending on your specific policy.

What is coinsurance?

Coinsurance is the percentage of the bill you still have to pay after you’ve reached your deductible, but before you’ve reached your policy’s out-of-pocket maximum, according to Forbes. Typically, coinsurance is between 20% and 40%, depending on your health insurance policy. For example, if your coinsurance is 20%, you pay 20% of the bill and your insurance covers the other 80%.

What is a copay?

A copayment – or copay – is what you pay the actual medical professional, such as a pharmacist, doctor, physician’s assistant, etc., but not your health insurance company. Copays are typically lower when seeing your primary care physician versus a specialist, says Forbes. That’s because specialist care is often more expensive.

Insurers offer a range of deductibles, and you can typically choose the deductible that fits your needs. According to the Insurance Information Institute (III), common deductible amounts for home and auto insurance coverages are $500 and $1,000 — but amounts vary among insurers and policies.

Depending on your policy, and the types of coverages you have, a deductible may be required.

With an auto insurance policy, coverages like comprehensive and collision may require a deductible before said coverages apply in the event of a covered incident.

Renters insurance and homeowners insurance deductibles work in much the same way. If your home or personal belongings are damaged by a covered event, you’ll typically need to pay the deductible before insurance covers the remaining costs to repair or replace your property. Same goes for liability claims – if someone is injured on your property and decides to sue, you’d pay a deductible and coverage may help cover the rest of the medical and legal costs.

Health insurance plans commonly require you to pay one deductible before insurance starts to pay for medical expenses. Some health policies may include two types of deductibles, explains CNBC – one for medical care and one for pharmacy purchases.

Again, that the lower your deductible, the higher your premium is likely to be.

When you might not need to pay a deductible

There are also situations where deductibles might not be required. As noted above, comprehensive and collision come with a deductible – but if they include a glass repair agreement, a deductible may not be required for glass repair claims. Full glass coverage, as a standalone protection, also may not include a deductible.

Most health plans come with a deductible. Once you meet that deductible, you would no longer be required to pay one. There are also “no-deductible” health plans, but remember that lower deductibles tend to mean higher premiums. Given that, health plans with zero deductibles may have much higher premiums than a standard health plan.

Your deductible typically affects your premium, or the cost you pay for your policy. The higher your deductible, the lower your premium will likely be. The reason is, with a higher deductible, you’re taking greater responsibility for the initial expenses of a claim.

When purchasing auto, renters, homeowners or health insurance, you’ll have the opportunity to choose a deductible. Choosing a high or low deductible has its pros and cons, depending on what’s most comfortable for you.

Pros and cons of high deductibles

High deductibles mean you pay more out of your pocket before your insurance kicks in. Here's why they might be good or not so good.

Pros:
Usually, if you choose a high deductible, your monthly payments, or premiums, might be lower. That could save you money every month.

Additionally, if you don't go to the doctor often or you're a safe driver, a high deductible might work well for you. You might not need to use your insurance much, so paying less each month could be smart.

Cons:
If you get in a car accident or need a medical procedure for a sudden illness, you'll have to pay more money before your insurance starts helping. That could be tough if you don't have a lot of savings.

Pros and cons of low deductibles

Low deductibles mean you pay less upfront before your insurance helps. Here's why they might be good or not so good.

Pros:
Not paying so much out of pocket upfront may be helpful if your budget is tight. Lower deductibles may also be useful if you need to frequent health care, or don’t drive a lot.

Cons:
The downside is that lower deductibles typically mean higher premiums. If you rarely need medical care or your driving record is spotless, you might end up paying more over time with a low deductible.

So, what should you do? For starters, it’s always a good idea is to get quotes from different insurance companies. They can tell you how much you'll pay each month with different deductibles. Then you can see what works best for your budget and your needs. If you're not sure, you can always talk with your insurer. They should be able to help you figure out the right deductible for you. When you do get quotes from different companies, you’ll also want to weigh other aspects, like coverages, limits, discounts and the company’s reputation.