What Is a Health Insurance Deductible?

When it comes to insurance, there are a lot of terms to keep track of—premium, copay, coinsurance, deductible. While you don’t have to be an expert in all insurance terms, the more you understand about what they mean, the better decisions you can make. Today we’ll dive into what a deductible is and how it works with other components of a health insurance plan—and how your decisions about health insurance can impact your overall budget.  

What is a deductible?  

In a health insurance plan, a deductible is the amount of money you must pay out of pocket within a year before eligible health services will be covered by your insurance provider. Once you have met your deductible, your health insurance plan will begin to cover qualified services (which may include discounted services or full coverage of services, depending on your plan). However, many insurance plans will cover some preventive care services whether or not you have met your deductible. Services like well-child visits, mammograms and annual physicals are sometimes covered before you have met your deductible.  

Your deductible amount will vary based on a variety of factors, like whether you’re on an individual plan or a family plan. An individual plan will have a smaller deductible because you’re the only person on the plan, whereas a family plan’s deductible is often around double what an individual plan’s deductible would be. A plan’s deductible also depends on how much your monthly premium is. Generally speaking, plans with higher monthly premiums have a lower deductible, and plans with lower monthly premiums have a higher deductible.  

How deductibles work in a health care plan  

Each year, you’ll select a coverage plan to cover you for that year. To decide, you’ll consider the premium (how much you pay per month for the coverage), the deductible and, depending on specifics of the plan, the copayments required for you to pay out-of-pocket for services after you reach your deductible. If you’re on an employer-sponsored health care plan, the monthly premium for whichever plan you select will be taken out of your paycheck pre-tax. You’re also able to purchase your own insurance on the market or through the Affordable Care Act (ACA).  

As you see health care providers for services, you’ll pay out of pocket for those services until you’ve met the deductible. At that point, insurance will begin covering services for you under the plan. However, there are a few exceptions.  

Copayments (fixed amounts that you’re responsible for paying toward the cost of a particular service) and coinsurance (a percentage of costs you’re responsible to pay for certain services) do not go toward the deductible. Not all plans have copayments and coinsurance, but if your plan does, these are expenses you’ll have to pay outside the deductible until you reach your out-of-pocket maximum. An out-of-pocket maximum is the most you’ll have to pay in total in one year (including deductibles, copayments and coinsurance—but not including premiums).  

Say, for example, your deductible is $1,500, and you had a medical event that resulted in a $20,000 hospital stay. You would be responsible for paying the first $1,500 out of pocket. Beyond the $1,500 deductible, your insurance would kick in. However, depending on your maximum out-of-pocket limits, you may be responsible for additional copayments or future medical expenses up to your total out-of-pocket limit.    

Selecting health care providers that match your plan 

It’s important to pay attention to your type of health care insurance plan when scheduling medical services. Certain insurance companies negotiate with certain health care providers, and by using those providers, your care may be discounted or included in your coverage.  

For example, if you have a Preferred Provider Organization (PPO) plan—a common type of health care insurance plan—you pay less if you use providers within your plan’s network. While you’re able to see a doctor outside that network, copays may be higher, and costs for the out-of-network visit often don’t go toward a deductible or out-of-pocket maximum. Some plans also may have a separate deductible for in-network or out-of-network services. (Or sometimes there’s a higher out-of-pocket maximum that includes out-of-network services.)  

Which is better: a high or low deductible? 

A high-deductible plan is one that has an annual deductible of at least $1,500 for an individual or $3,000 for a family, according to 2023 U.S. tax code. Plans with a high deductible can be more affordable, both for an insurance company and for a healthy individual. High-deductible plans usually come with a lower monthly premium, so if you’re healthy and don’t expect to use your health insurance too often, this can be a good way to save yourself (and the insurance company) some money.  

You’ll pay a higher monthly premium for a low-deductible plan, but the amount you’ll need to pay out of pocket before services are covered will also typically be lower. If you have a chronic health condition, have kids (who are often sick more frequently or more prone to getting injuries than adults), or have a planned medical event (like the birth of a child), selecting a low-deductible plan could be a better option for you in the long run.  

How much is an average deductible? 

According to the Kaiser Family Foundation, the average deductible in 2022 for someone on an employer-provided plan was $2,543 for an individual at a small company or $1,493 for an individual at a large company. 

What happens if you don’t meet your deductible?  

If you don’t meet your deductible within a given plan year, you’d simply pay out of pocket for medical services that are not otherwise covered within that year. Health plans typically run on one-year terms, meaning you’re able to make changes to your health care plan each year during an open enrollment period. Many plans also allow changes to be made at certain qualifying life events, such as a marriage, the birth of a child or a new job (for you or your spouse). 

Additional ways to cover out-of-pocket expenses 

If you do select a high-deductible plan, you may have other options for offsetting your out-of-pocket costs, like a health savings account (HSA) or a flexible spending account (FSA). These accounts allow you to put pre-tax money toward medical expenses. The main differences between the two are whether you can roll over unused funds at the end of the year and what you’re able to spend the funds on.  

With an HSA, you’re able to make contributions and withdrawals on your own (as long as you spend the money on a qualified health care expense) or, depending on your employer, through pre-tax payroll deductions, and funds can roll over from year to year. An FSA is typically funded through regularly scheduled pre-tax deductions from your gross pay. You’re not able to make direct withdrawals from an FSA, and any funds not used by the end of the year are forfeited. 

Pros and cons of FSAs and HSAs 

FSAs and HSAs can both help offset out-of-pocket medical expenses, and they each have their perks and drawbacks:  

FSA 

• Pro: You’re able to use an FSA for more expenses than an HSA allows (like purchasing medical supplies or paying for childcare). 

• Con: You’re unable to make withdrawals from an FSA. 

• Con: You’ll lose any funds that aren’t used by the end of the year.  

• Con: Contributions are deducted from your gross pay and can’t be adjusted throughout the year.  

• Con: If you change jobs, you lose the account. 

HSA 

• Pro: Funds can be invested and earn tax-free interest and then used to pay health care expenses in the future. 

• Pro: You’re able to change the amount deducted from your paycheck throughout the year. 

• Pro: Unused contributions can be rolled over into the next year. 

• Pro: Self-employed individuals are eligible to open an HSA. 

• Pro: Even if you change jobs, you can keep the account.  

• Con: Withdrawals for non-medical expenses are allowed but are subject to a 10% tax penalty. 

How to choose the right health care plan 

Which health care plan to select is a personal decision that depends largely on your monthly budget, your family situation and your health situation. If you are married and/or have children, you may want to weigh costs of enrolling in a family plan vs. carrying individual insurance. If your spouse works, you’ll also want to compare what his or her plan offers and consider taking your spouse’s insurance, as each company offers different plans with different premiums and deductibles.  

You’ll also want to consider individual health needs. If you have a condition or situation that might result in you using your health insurance more frequently, you may want to consider a lower-deductible plan. However, the lower-deductible plans often cost more per month, so you’ll also have to weigh the extra premiums against the difference in the size of the deductible as well as look at your monthly budget. And if you have questions about how the plan might fit into your overall financial picture, a financial advisor can help.