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Insurance For Beginners: How Does An Insurance Deductible & Copay Work?

Updated on February 24, 2014

Most people reading this article should probably be aware of what insurance is. But for those who don't understand it, it revolves around the concept of risk and reimbursement for a variety of damages or loss. How it basically works is that an insurance company or insurance provider will guarantee an individual compensation in the event of some form of loss or damage, for example to a vehicle or to your health. In order to have this guarantee or safety net though, the insurance company charges what is called a 'premium' which is a fee that they think is reasonable based on the risk and the value of the entity being insured.

Insurance can cover a wide variety of things and in many cases it is illegal not to carry it. The prime example of this being car insurance. Having been involved in my first car accident recently I was exposed to the world of insurance more than ever before, and want to pass on a few basic facts that may help young people stepping into this world of insurance on their own.

A couple key insurance definitions that everyone should know are the 'deductible' and 'copay,' both of which I will discuss in detail in this article.

These people will need to know all about their insurance deductible!
These people will need to know all about their insurance deductible! | Source

What is a Deductible?

A deductible is a feature that you will see in basically every type of insurance coverage out there. It is the amount that the insured party must pay in the event of a claim, before the insurance company begins paying. For example, if you have car insurance with a deductible of $500, if you have an accident and make a claim, you will have to pay the first $500, and the insurance company will cover the rest. So if the claim ended up being for $5000, the insurance company would pay $4500.

There are a variety of more detailed rules with regards to deductibles, which change based on the coverage type, the type of insurance and the amount you want to pay for your premium. One thing that is generally the case is that the amount of deductible plays a part in the cost of your insurance premium. So if you opt to have a very low deductible, you will likely pay more for your premium, and vice versa. This means you have to assess how much you think you would be able to cover in the event of a claim, and balance that against the amount you can afford to pay in premiums.

While there are too many subtle details to mention, here are some differences in the ways an insurance deductible works in two of the most common types of insurance, auto and health care:

Auto Deductibles

Automotive insurance differs in most states around the USA and there are various types, including some states that have 'no-fault' insurance while others consider who is at fault in an accident more closely. But with these differences come some room for differences between a variety of coverage. One thing that often happens in automotive insurance, is that if you are not at fault, you may not have to pay your deductible, where as if you are at fault, then your deductible stands. This is something you should check into with your own policy.

Medical Deductibles

One feature of a health care deductible is that because medical treatments are generally or potentially more continual than one-off accidents or damages to property, the deductible system is a bit more lenient in that it often applies over a period of time, referred to commonly as a 'term'. A common example of a 'term' would be a year, so in this case a deductible applies on an annual basis, and once the insured party has paid out that deductible, they do not have to pay it again util the term resets. This is in contrast to a 'per-visit' deductible, as you would see in car insurance. Note that this is not always the case, and the situation will vary in different types of insurance and policies.

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What is Copay?

A co-pay is a little different to a deductible and applies to medical insurance. In basic terms, it is a fixed amount of money that the insured party will pay for certain health care services, such as doctor visits. For example, if your doctors copay is $25, you will pay $25 every time you visit the doctor for a check-up. There will be similar copay amounts for other types of visits, such as dentist visits or emergency room visits. The prices will vary based on the service.

One thing to note is that most health care insurance plans will have an 'out of pocket maximum' for a particular term, and if the total of all copay paid out, as well as deductibles, exceeds this maximum, the insurance company will then pay these for the rest of the term. It is important for you to check your plan so you are aware of what your out of pocket maximum is.

Copay is similar to deductible, in that when you apply for health insurance you should balance the copay amount with the premium cost. If you think that you will visit the doctor a lot, it may be worth paying a few dollars more per month in premiums in order to have a very low copay. If you rarely visit the doctor, then you may want to have a higher copay in order to save money on your insurance premium!

A good example of deductible and copay statistics from the controversial Obamacare system.
A good example of deductible and copay statistics from the controversial Obamacare system. | Source

Key Insurance Terms Recap

A guarantee by an insurance company to pay compensation in the event of some form of loss, damage or need in return for a fee.
An insurance premium is the fee charged for the guarantee of compensation.
An amount that the insured party will be expected to pay in the event of a claim, prior to the insurance company beginning to pay the remaining balance of the claim.
A fixed amount that the insured must pay for certain medical services, such as a doctors visit.
Out of Pocket Max
The maximum amount one will be made to pay in the form of copay or deductible before the insurance company pays 100%

Insurance Tips: Key Things To Remember About Your Insurance Deductible!

To recap, here are some key things you should consider with regards to your insurance deductible for both medical insurance and auto insurance. You may find that some are repeated in both categories!

Auto Insurance

  • Make sure that you can afford your deductible! In the case of an accident, you will be expected to pay your deductible, so if you think it is too much you may want to have it decreased and opt for paying a little more on your monthly premium.
  • Depending on the type of insurance laws that exist in your state, you may not have to pay your deductible if you were not at fault during the accident. Make sure you check with your insurance company what the rules are in regards this this.
  • Do the math! Look at how much you would save on premiums if you raised your deductible and balance this against how much you would be out of pocket if you had an accident. Then consider how safe of a driver you are and your history of claims. But remember, an accident can happen to anyone!

Medical Insurance

  • Again, make sure you can afford your deductible, just as with auto insurance! If you can't, you might want to change it!
  • Know the date that your deductible term ends. You don't want to get caught thinking that your deductible is already paid, only to find out it has rolled over and you owe now. Also, if you have covered your entire deductible and you still have some medical care you need, such as a surgery, you would want to make sure you scheduled it before your new deductible amount kicks in again!
  • Certain services or treatments have different or separate deductibles, so make sure you understand which things apply to which. Confusion here can cause some problems if you think you won't be paying or get the numbers wrong.
  • Balance your deductible amount and premium amount based on how often you think you'll go to the doctor. If you never go, raise your copay and deductible. If you go often, pay a higher premium to lower the copay.

I hope this article has been informative and may help you move into the world of insurance!

Don't let money slip away by not understanding your insurance deductible and copay!
Don't let money slip away by not understanding your insurance deductible and copay!


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