Reviewed by Sep 30, 2020| Updated on
If you're in the insurance market, you might wonder what a deductible is in insurance policies for health, automobiles, or homeowners — and how it works. Insurance deductibles are common to property products, liability products, and health insurance.
The insurance deductible refers to the amount of money you will be paying in an insurance claim prior to the insurance coverage kicking in, and the company begins to pay you. When you have a deductible, you need to get the amount of money for your deductible before a claim gets paid out.
Once you clear the deductibles, the insurance company will pay you up to the policy limits and conditions in the wording for the rest of the claim value. Usually, the higher the limit on your account, the lower the annual or monthly premium costs. That is because, before coverage starts, you're responsible for further expenses.
Deductibles provide insurance companies with the opportunity to share costs with policyholders when they file claims. However, there are other reasons why companies use deductibles, such as moral hazards and financial stability.
Deductibles help minimise the risk of moral hazards to the conduct. A moral hazard is the risk of a policyholder failing to act with good faith. Insurance policies shield policyholders against risks while creating an implicit moral hazard: the insured party can engage in risky conduct without financial consequences.
For example, if drivers have car insurance, it does not mean that they can drive recklessly or leave their vehicle unattended in a dangerous area because they are protected against harm and theft.
Insurance plans often use deductibles to guarantee that the provider takes a measure of financial security. It protects from financial loss by a correctly designed insurance policy. A deductible provides a buffer between any given minimal loss and a loss which is truly catastrophic.
Deductibles are only a part of the expenses you face with a health insurance policy. You pay part of the price, in addition to your monthly fee, by:
Deductible: It refers to the value one must spend on covered healthcare expenses each year before the insurance starts to clear some of the costs. Overall, the lower the premium for health benefits, the more expensive the policy is.
Co-pay: There are fixed rates you pay for various healthcare benefits that have been covered. For instance, if one's policy has a co-pay clause of 10% and your claim is Rs 2,00,000, then you may have to pay Rs 20,000. The insurer will cover the remaining amount.
Coinsurance: After meeting the deductible, one will be responsible for some of your healthcare costs, and the rest will be paid for by your plan. The term coinsurance is used. You continue to pay coinsurance until the year you reach your maximum out-of-pocket.